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Part I. Rulings and Decisions Under the Internal Revenue Code of 1986
Section 1502.—Regulations
26 CFR 1.1502–21: Net operating losses.

T.D. 8823
DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Parts 1, 301, and 602
Consolidated Returns—
Limitations on the Use of
Certain Losses and Deductions
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Final and temporary regulations.
SUMMARY: This document contains
final regulations regarding certain deductions and losses, including built-in deductions and losses, of members who join a
consolidated group. The regulations provide rules for computing the limitation
with respect to separate return limitation
year (SRLY) losses, and the carryover or
carryback of losses to consolidated and
separate return years. The regulations
also eliminate the application of the
SRLY rules in certain circumstances in
which the rules of section 382 of the Internal Revenue Code also apply.
DATES: Effective Dates: These regulations are effective June 25, 1999.
Applicability Dates: For dates of applicability, see the “Dates of Applicability” portion of this preamble.
FOR FURTHER INFORMATION CONTACT: Jeffrey L. Vogel, or Marie MilnesVasquez at (202) 622-7770 (not a toll-free
number).
SUPPLEMENTARY INFORMATION:
Paperwork Reduction Act
The collection of information in this
final rule has been reviewed and, pending
receipt and evaluation of public comments, approved by the Office of Management and Budget (OMB) under 44
U.S.C. 3507 and assigned control number
1545–1237.

July 19, 1999

The collection of information in this
regulation is in §1.1502–21(b)(3). This
information is required to ensure that an
election to relinquish a carryback period
is properly documented, and will be used
for that purpose. The collection of information is required to obtain a benefit (relating to the carryover of losses which
would otherwise be carried back). The
likely respondents are consolidated
groups.
Comments on the collection of information should be sent to the Office of
Management and Budget, Attn: Desk
Officer for the Department of the Treasury, Office of Information and Regulatory Affairs, Washington, DC 20503, with
copies to the Internal Revenue Service,
Attn: IRS Reports Clearance Officer,
OP:FS:FP, Washington, DC 20224. Comments on the collection of information
should be received by August 31, 1999.
Comments are specifically requested
concerning: Whether the collection of information is necessary for the proper performance of the functions of the Internal
Revenue Service, including whether the
information will have practical utility;
The accuracy of the estimated burden
associated with the collection of information (see below);
How the quality, utility, and clarity of the
information to be collected may be enhanced;
How the burden of complying with the
collection of information may be minimized, including through the application
of automated collection techniques or
other forms of information technology;
and
Estimates of capital or start-up costs and
costs of operation, maintenance, and purchase of service to provide information.
Estimated total annual reporting burden:
2,000 hours.
Estimated average annual burden hours
per respondent: 15 minutes. Estimated
number of respondents: 8,000.
Estimated annual frequency of responses:
On occasion.
An agency may not conduct or sponsor,
and a person is not required to respond
to, a collection of information unless it
displays a valid control number assigned
by the Office of Management and Budget.

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Books or records relating to a collection of information must be retained as
long as their contents may become material in the administration of any internal
revenue law. Generally, tax returns and
tax return information are confidential, as
required by 26 U.S.C. 6103.
Background and Explanation of
Provisions
On February 4, 1991, the Treasury and
the IRS issued three notices of proposed
rulemaking, CO–132–87 (56 F.R. 4194
[1991–1 C.B. 728]), CO–077–90 (56 F.R.
4183 [1991–1 C.B. 749]), and CO–078–
90 (56 F.R. 4228 [1991–1 C.B. 757]), setting forth amendments to the rules regarding net operating losses, built-in deductions, and capital losses of consolidated
groups. Those proposed regulations also
included rules regarding the carryover
and carryback of losses to consolidated
return years and separate return years, and
rules regarding the application of section
382 and 383 by consolidated groups and
by controlled groups. A public hearing
regarding the three sets of proposed regulations was held on April 8, 1991.
On June 27, 1996, the Treasury and the
IRS published temporary regulations regarding the separate return limitation year
(SRLY) limitation (T.D. 8677, 61 F.R.
33321 [1996–2 C.B. 119]). These regulations were substantially identical to the
proposed regulations. A notice of proposed rulemaking cross-referencing the
temporary regulations, the 1996 proposed
SRLY regulations, was published in the
Federal Register on the same day (CO–
024–96, 61 F.R. 33393 [1996–2 C.B.
437]), and the proposed regulations published in 1991 were withdrawn. The
Treasury and the IRS also published temporary regulations (T.D. 8678, 61 F.R.
33335 [1996–2 C.B. 134]) setting forth
rules regarding the application of section
382 to affiliated groups of corporations
filing consolidated returns, and controlled
group losses (T.D. 8679, 61 F.R. 33313
[1996–2 C.B. 25]). Notices of proposed
rulemaking cross-referencing these temporary regulations were published on the
same day (CO–026–96, 61 F.R. 33391
[1996–2 C.B. 440] and CO–025–96, 61
F.R. 33395 [1996–2 C.B. 439]), and the

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earlier proposed regulations published in
1991 were withdrawn.
On August 10, 1998, the Treasury and
the IRS issued Notice 98–38 (1998–32
I.R.B. 4). The Notice requested comments about the advisability of adopting
rules that would replace the existing
SRLY rules with an approach modeled on
section 382.
As companions to this Treasury decision, which adopts the 1996 proposed
SRLY regulations with certain revisions
and modifications, the Treasury and the
IRS are also issuing final regulations relating to the application of sections 382
and 383 by members of consolidated and
controlled groups. See T.D. 8824 on page
62, and T.D. 8825, 1999–28 I.R.B. 3.
On January 12, 1998, the Treasury and
IRS issued temporary and proposed regulations governing the use of tax credits of
a consolidated group and its members
(T.D. 8751, 63 F.R. 1740 [1998–10 I.R.B.
23]). The Treasury and IRS intend to finalize those regulations at a later date.
Operation of the Proposed and
Temporary Regulations
The 1991 proposed regulations generally retained the approach of the prior
SRLY regulations in limiting a consolidated group’s use of attributes arising in
or attributable to a SRLY, but altered the
manner in which the limitation is computed. While the pre-1991 regulations determined the limitation separately for
each member (fragmentation), and under
a year-by-year approach, the proposed
regulations introduced two new concepts:
subgrouping and the cumulative register.
Subgrouping was added because fragmentation is in many ways inconsistent
with the single entity approach to the use
of losses under the consolidated return
regulations. For example, if an entire
consolidated group were acquired by another group, under the fragmentation approach, none of the losses of a former
member of the target group could be used
to offset income of another former member of the target group. However, had no
acquisition occurred, those losses could
have been used to offset income within
the target group.
The 1991 proposed regulations also introduced the concept of a cumulative register to address certain issues resulting

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from the year-by-year approach. The
prior SRLY regulations based the limitation on the SRLY member’s annual contribution to the group’s consolidated taxable income. The SRLY limitation was
computed by taking the difference between the group’s consolidated taxable income “with” the SRLY member and
“without” the SRLY member. This resulted in certain anomalies. For example,
if a SRLY member produced income in a
tax year but the group as a whole did not
have income, the SRLY loss could not be
absorbed in that year. Because the member’s contribution to income was not carried over to later years, the SRLY losses
also could not be absorbed in a later year
unless the member also contributed to the
group’s taxable income in that year.
The cumulative register, rather than
looking to a member’s contribution for the
year, includes in the limitation computation a member’s complete income history
while it is a member of a consolidated
group. The cumulative register is determined by aggregating a member’s net contribution of income in excess of losses absorbed during the entire period the
member was in the consolidated group.
To the extent that the cumulative register
for a member is positive, that member’s
SRLY net operating losses can be absorbed in a consolidated return year (provided the group otherwise has taxable income) even though the member might not
have contributed to taxable income in that
year. On the other hand, if the cumulative
register is negative, the absorption of
losses is precluded even though the member might have contributed to taxable income in that consolidated return year.
Much of the complexity of the SRLY
rules results from the subgroup and cumulative register concepts. In fact, the preamble to the proposed SRLY regulations
acknowledged that the subgrouping approach was more complex than the fragmentation approach and solicited comments about whether the benefits
provided by subgrouping outweigh and
justify the additional burdens required,
and whether the fragmentation approach
should be retained. 1991–1 C.B. 759. No
comments received in response to this request advocated the elimination of subgrouping or the cumulative register, and it
was ultimately decided that these principles would be retained.

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Comments
Comments were received in response
to the 1991 proposed regulations, the
1996 temporary regulations and Notice
98–38. Some comments addressed
whether the SRLY rules should be retained. Other comments addressed issues
about the technical operation of the proposed rules.
All of the comments were evaluated in
finalizing these regulations. Several suggestions were adopted while others were
not. This preamble describes some of the
decisions that were made in finalizing the
regulations.
Elimination or Retention of SRLY
The preliminary issue considered in finalizing these regulations was the extent, if
any, to which the SRLY rules should be retained. The comments were divided about
whether to retain or eliminate SRLY.
Some commentators asserted that the
amendment to section 382 in 1986 adequately addressed Congressional concerns
regarding loss trafficking. Therefore, it
was argued, the SRLY rules should be
eliminated because they have become superfluous, add unwarranted complexity to
the consolidated return system, and are
easily avoided. Other commentators asserted that the SRLY rules should be retained because in their view, policing loss
trafficking is incidental to SRLY’s function
of resolving a single entity/separate entity
conflict in applying the consolidated return
regulations. A third group suggested a
middle position by urging the elimination
of SRLY only in those circumstances in
which the rules of section 382 also apply.
Arguments for Elimination of SRLY
Some commentators urged elimination
of the SRLY rules (either in whole or in
part) because, in their view, section 382
provides sufficient protection against loss
trafficking transactions. They asserted
that the rules of section 382 provide
greater precision and predictability about
the consequences of a transfer of tax
losses, and that section 382 promotes neutrality between a buyer and seller of tax
benefits in a more efficient and more equitable way than do the SRLY rules.
Section 382 and SRLY overlap to a
large extent, and the rules applying sec-

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tion 382 to consolidated groups are even
more complex than the SRLY rules.
Thus, these commentators asserted that
requiring a taxpayer to run the SRLY
gauntlet in addition to the section 382
gauntlet is unwarranted because any additional revenue that might be gained from
retaining a dual limitation is outweighed
by the added complexity of the SRLY
rules.
These commentators argued that the
complexity of the SRLY rules is unwarranted because the impact of the SRLY
rules is easily avoided by various “selfhelp” techniques. For example, taxpayers
can contribute income-producing assets
or built-in gain assets to the SRLY member to minimize the effect of a SRLY limitation. They also argued that the SRLY
rules impose a meaningful limitation only
in those cases in which, for regulatory or
other reasons, loss corporations cannot be
combined with other profitable businesses. Some commentators also argued
that the SRLY rules improperly discriminate between stock and asset acquisitions.
Other arguments urging the elimination of
SRLY asserted that section 382 supercedes the SRLY rules as a Congressionally mandated rule for policing loss
trafficking and that the SRLY rules are inconsistent with treating the consolidated
group as a single entity.
Arguments for Retention of SRLY
Notwithstanding the substantial area of
overlap between section 382 and SRLY,
section 382 does not always apply when
SRLY does. In fact, most commentators
expressed concern about loss trafficking
through carryback transactions (to which
section 382 does not apply) and acknowledged the need for a rule to police those
transactions. Many urged retention of the
existing SRLY rules at least for that purpose. Moreover, some commentators
speculated that elimination of the SRLY
rules would likely present new unforeseen opportunities for trafficking in tax
benefits.
Those commentators supporting retention of SRLY argued that the objectives of
section 382 and SRLY differ. Section
382, which seeks to prevent loss trafficking, is based on the notion that the rate of
loss utilization following a change in
ownership should be based on the ex-

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pected income generated if all of the assets were converted to tax-exempt debt
instruments. Accordingly, section 382
permits a fixed amount of income to be
used each year to absorb a loss, regardless
of the actual income contribution of the
loss corporation. Moreover, under section 382 and in the absence of SRLY, the
available loss can be used against any
member’s income. SRLY, on the other
hand, makes actual income generation by
the SRLY member the determinant of loss
usage. Thus, SRLY assures that the loss
attributes that arose outside of the consolidated group are not generally available to
the other group members.
These commentators noted that the
consolidated return system combines single and separate entity treatment. The
ability to offset the income of one member with the losses of another member reflects single entity treatment of the consolidated group. But, when a corporation
becomes a member of a consolidated
group, it retains its separate existence and
individual status, its own accounting
methods, and its own separate attributes,
including its losses that are carried from a
separate return year to a consolidated return year. These aspects reflect treatment
of each member of a consolidated group
as a separate entity. The carryover of
losses from separate return years reflects
separate entity treatment, while the sharing of losses among the members of a
consolidated group reflects single entity
treatment. Thus, there is a conflict between single entity and separate entity
treatment. Single entity treatment in
computing consolidated taxable income is
inconsistent with permitting a corporation’s losses to straddle consolidated and
separate return years when it enters or
leaves a consolidated group. These commentators argued that the SRLY rules present a resolution of this conflict and protect the integrity of the consolidated
return system by ensuring that attributes
arising in a separate return year belong to,
and remain with, the SRLY member, and
attributes arising in a consolidated return
year belong to the group.
Through these rules, according to these
commentators, SRLY seeks to provide
that the manner and extent to which a corporation’s separate tax attributes are absorbed or utilized should not vary based
on whether the corporation is inside or

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outside a consolidated group. Unlike in
the case of section 382, the policy objectives underlying these rules do not hinge
on whether the ownership of the corporation changes upon its entrance into or departure from the group.
Moreover, commentators urging the retention of SRLY pointed out that the rules
of section 381 dictate the circumstances
under which one corporation can use the
tax attributes of another corporation. In
certain reorganizations, section 381 allows the tax attributes of one corporation
to be used by another corporation after an
acquisition, but in those transactions generally stock basis is also lost. By contrast,
in a taxable stock purchase where the
stock takes a cost basis and the corporation retains its existence, including its underlying attributes, there is no policy reason for those attributes to be freely
available to the purchaser. In essence,
these commentators argued, the SRLY
limitation prevents the benefits provided
by section 381 in certain reorganization
transactions from being extended to acquisitions and restructurings that do not
involve the commingling of assets in one
entity that section 381 transactions generally require. A consolidated group’s acquisition of the stock of a corporation
should not be treated the same way as an
asset acquisition.
Notice 98–38
Notice 98–38 announced that the Treasury and the IRS were considering an approach that would model the SRLY limitation on the mechanism of section 382.
One intended advantage of this approach
was to reduce complexity in cases of
overlap of the SRLY rules with section
382. In those cases, the SRLY limitation
would be the same as the section 382 limitation, and consolidated groups would
not need to make two computations to determine how much income could be used
to absorb a loss. A second intended advantage was to address concerns that the
impact of a SRLY limitation can be minimized by stuffing transactions (e.g., transferring income-producing assets to the
loss corporation) which could not be used
to affect the section 382 limitation.
Although many commentators favor
the elimination of a separate SRLY limita-

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tion in the case where section 382 also applies, commentators did not favor adoption of the section 382 mechanism in
cases where section 382 does not otherwise apply. Commentators argued that
imposing a limitation based on section
382 in a case where section 382 would not
otherwise apply would be inordinately
burdensome. Because (absent an ownership change) the owners of a loss corporation held outside a consolidated group
could engage in a stuffing transaction in
order to increase that corporation’s loss
absorption, commentators argued that a
SRLY limitation that could not be increased through stuffing transactions
would violate the objective of providing
that the extent of a corporation’s loss absorption should not vary based on
whether it is inside or outside a consolidated group.
In light of these concerns, the Treasury
and the IRS decided not to impose a
SRLY limitation based on the mechanism
of section 382.
The Overlap Rule
The Treasury and the IRS believe that
limitations on the extent to which a consolidated group can use attributes arising
in a separate return limitation year remain
necessary. However, the Treasury and the
IRS remain concerned about complexity
in applying the current SRLY rules, particularly with respect to situations where
both the SRLY rules and section 382
apply. As described above, the SRLY
limitation is based on the member’s (or
subgroup’s) actual contribution to consolidated taxable income. The section 382
limitation is based on the expected income generation of the member (or subgroup) determined with reference to its
value on the change date. On balance, the
Treasury and the IRS believe that the simultaneous or proximate imposition of a
section 382 limitation reasonably approximates a corresponding SRLY limitation.
Accordingly, these regulations generally
eliminate the SRLY limitation in circumstances in which its application overlaps
with that of section 382.
In the majority of cases, the date on
which a corporation becomes a member
of a consolidated group (and thus subject
to the SRLY rules) is also a “change date”
as defined in section 382(j), determined

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as a result of an ownership change as defined in section 382(g). In this situation,
under the temporary regulations, taxpayers must calculate two separate limitations for loss carryovers — the SRLY limitation and the section 382 limitation.
The final regulations provide an overlap
rule which eliminates the application of
the SRLY rules in this situation. As a result, the final regulations remove the burden of determining two limitations, and
simplify the loss limitation rules applicable to consolidated groups in most instances in which both the SRLY and the
section 382 limitations would otherwise
arise.
To address situations in which not all of
an acquisition occurs simultaneously, the
overlap rule also applies if the acquisition
results in a corporation joining the consolidated group on a date other than the
“change date”, provided the transactions
are separated by no more than six months.
Additional rules have been included to
prevent the inappropriate operation of the
overlap rule in certain cases involving the
acquisition of multiple corporations.
Net Operating Losses
Generally, to qualify for the net operating loss overlap rule, a corporation must
become a member of a consolidated
group (a SRLY event) within six months
of the change date of an ownership
change that gives rise to a section 382(a)
limitation with respect to that carryover (a
section 382 event). For net operating
losses, an overlap also will generally include situations in which a net operating
loss arises in the maximum six month period after the section 382 event but before
the SRLY event.
For example, if a section 382 event occurs on April 1 and a SRLY event occurs
on September 1, any losses that arise between April 1 and September 1 would not
be subject to a section 382 limitation because they would be allocable to the postchange period. However, in the absence
of the overlap rule, those losses would be
subject to a SRLY limitation. The overlap rule of the final regulations eliminates
the application of SRLY to those postchange losses. In cases of an acquisition
of a single corporation, the elimination of
SRLY has been determined to be an appropriate result and is a trade-off to pro-

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mote simplicity in the consolidated return
regulations.
The final regulations provide special
overlap rules for subgroups. In general,
the overlap rule applies to the subgroup
and not separately to the members of the
subgroup. However, the overlap rule
does not apply unless the SRLY subgroup
is coextensive with the section 382 loss
subgroup. This rule is necessary because
a section 382 subgroup limitation that is
computed with respect to the expected income generation of a group of corporations does not reasonably approximate a
limitation that would be based on the actual contribution to consolidated taxable
income by a smaller number of corporations. In the reverse case, where the
SRLY subgroup is larger than any corresponding section 382 loss subgroup or
single new loss member, and particularly
with respect to built-in losses, it is unclear
in certain circumstances how the overlap
rule could be applied. To address such
circumstances in which a SRLY subgroup
would otherwise be larger than the corresponding section 382 subgroup or single
new loss member, the accompanying final
regulations relating to the application of
sections 382 and 383 provide for an election effectively to expand a newly-formed
section 382 subgroup to conform with a
SRLY subgroup.
For example, assume that the S consolidated group (composed entirely of S and
T) has a $200 consolidated net operating
loss, of which $100 is attributable to S
and $100 is attributable to T. If the M
group acquires the S group, S and T compose both a SRLY subgroup as well as a
section 382 loss subgroup. Because the
subgroups are coextensive, the overlap
rule applies to eliminate the application of
SRLY in the M group for the $200 consolidated net operating loss.
The overlap rule will not apply, however, if all the corporations included in a
section 382 loss subgroup are not also included in a SRLY subgroup. For example, in Year 1, T joins the S group with a
net operating loss carryover in a transaction that is not subject to section 382, and
T does not subsequently have an ownership change. Under §1.1502–96 (relating
to the end of separate tracking), after five
years, T’s net operating loss becomes an
attribute of the S group (also referred to as

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a “fold-in”) for section 382 purposes. If
the P group later acquires S in a transaction to which section 382 applies, the section 382 loss subgroup with respect to the
T loss would include S and T, but for
SRLY purposes there would be no subgroup. In this situation, the overlap rule
would not apply, and the limitations under
both SRLY and section 382 would continue to apply.
To preserve the effect of the elimination of SRLY under the overlap rule as
corporations move from group to group,
the final regulations also provide a special
rule expanding the definition of SRLY
subgroups. Under this rule, a SRLY subgroup includes a member carrying over a
loss that was subject to the overlap rule in
a former group, and all members of that
former group who become a member of
the current group at the same time as the
loss member. The effect of this rule is to
increase the number of circumstances in
which SRLY subgroups and section 382
subgroups will be coextensive as corporations move from group to group. However, SRLY and section 382 subgroups
may not be coextensive with respect to
losses that were carried into a former
group in a transaction to which the overlap rule does not apply. Subgroups may
not be coextensive, as demonstrated
above, if for purposes of section 382, such
losses “fold-in” to the former group by
virtue of an ownership change occurring
more than six months after the SRLY
event or because the loss member remains
a member of the former group for at least
five years.
Operating Rules
If the section 382 event occurs on the
same date as the SRLY event or precedes
the SRLY event, the overlap rule, and
therefore the elimination of SRLY, is applicable to the tax year that includes the
SRLY event. If the SRLY event precedes
the section 382 event, the elimination of
SRLY is delayed until the first tax year
that begins after the section 382 event.
The delay is necessary to ensure that an
adequate limitation is always in effect for
a net operating loss carryover.
For example, for a calendar year consolidated group, if the SRLY event occurs
December 1, Year 1, but the section 382
event occurs on April 1, Year 2, it is necessary to maintain the application of the

July 19, 1999

SRLY rules between such dates because
otherwise no limitation would be applicable and the separate attributes could be
freely absorbed during that period.
Built-in Losses
The overlap rule for built-in losses is
very similar to the overlap rule for net operating losses. Generally, to qualify for
the built-in loss overlap rule, a SRLY
event must occur within six months of the
change date of an ownership change that
gives rise to a section 382(a) limitation
that would apply to recognized built-in
losses (a section 382 event). However,
the overlap rule does not apply (even with
respect to assets held on the date of the
section 382 event) if assets are transferred
to a corporation after the section 382
event and before the SRLY event that exceed the de minimis threshold of section
382(h). In that case, both the SRLY rules
and the section 382 rules will apply. Even
after the application of the overlap rule,
the SRLY rules for built-in losses apply to
asset acquisitions by an acquired corporation that occur after the latter or the SRLY
event or section 382 event.
Special Subgroup Rule for Built-in Losses
The temporary regulations provide
that, for purposes of built-in losses, a
SRLY subgroup consists of those members that have been continuously affiliated for the 60-month period ending immediately before they become members
of the group in which the loss is recognized. Generally, the final regulations
maintain the subgroup rule provided by
the temporary regulations. The final regulations, however, modify the subgroup
rules to take account of the overlap rule.
These modifications, in effect, conform
the SRLY subgroup rules to adopt principles contained in §§1.1502–91 through
1.1502–98 (regarding the application of
section 382 to consolidated groups) where
necessary to preserve the effect of an
overlap transaction in a former group and
to increase the number of SRLY and section 382 subgroups that are coextensive
and eligible for future operation of the
overlap rule as corporations move from
group to group.
The final regulations provide that after
a corporation joins a group in an overlap
transaction, it is deemed to have been affiliated with the common parent of the ac-

38

quiring group for 60 consecutive months.
Those corporations that join the group in
the same transaction, but that were not
part of a subgroup eligible for the overlap
rule, begin measuring the period of their
affiliation immediately after joining the
group, notwithstanding their actual affiliation history. This rule may prevent some
corporations from subsequently qualifying as a SRLY subgroup, notwithstanding
their actual affiliation history. For example, assume that after four years of affiliation, S and T join the P group without any
net operating loss carryovers. S, which
has a net unrealized built-in loss, and T,
which has a net unrealized built-in gain,
would not qualify as a SRLY subgroup
with respect to their built-in items because they do not have the requisite affiliation history. Therefore, S and T are
tested separately under section 382 and
§1.1502–15. The acquisition results in S
becoming subject to section 382 (but
owing to the overlap rule, not to the limitation contained in §1.1502–15(a)). T is
not subject to either. Because S joined the
P group in a transaction subject to the
overlap rule, it is deemed to have been affiliated with P for 60 consecutive months.
T, however, is required to begin measuring its affiliation with P and S from the
date it joined the group, notwithstanding
its historic affiliation with S.
Other Substantive Changes
Predecessors and Successors
Material Difference Requirement
The temporary regulations provide that
a reference to a corporation or member
also includes, as the context may require,
a reference to a successor or predecessor.
See, §1.1502–15T(e) and §1.1502–
21T(f). The definition of predecessor is
provided in §1.1502–1(f)(4). In general,
a predecessor is any transferor of assets in
a section 381(a) transaction. A predecessor also includes any transferor of assets
in a transaction in which the basis of assets to the transferee (successor) is determined by reference to the transferor’s
basis, but only if there is a “material difference” between the basis and the value
of assets. Thus the application of the predecessor rule to a section 351 transaction
is dependent upon the specific assets
transferred, and consequently a transferor
in a section 351 transaction might not

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qualify as a predecessor. Also, in the case
of such a section 351 transaction, the temporary regulations provided that there be
a maximum of one predecessor to, or successor of, any member.
Commentators objected to the “material difference” requirement and suggested
that a section 351 transferee should not be
excluded from successor status solely because there was no material difference between the basis and value of the assets
transferred. The final regulations eliminate both the material difference and the
single predecessor-successor requirements.
CNOL Carrybacks
Section 1.1502–21T(b)(2)(B) of the
temporary regulations provides an offspring rule which generally permits the
common parent of a group to carryback a
consolidated net operating loss (CNOL)
attributable to a member that did not exist
in the year to which the loss is carried,
provided that the member has been a
member of the group continuously since
its organization. In that section, there is
also a reference to the application of the
predecessor and successor rule of
§1.1502–21T(f), which states that a reference to a member also includes references
to a predecessor of the member, as the
context may require.
Commentators were concerned that the
combination of the predecessor and successor rule would deny any carryback in
the case of a merger under section
368(a)(1)(A) and (a)(2)(D). For example, assume that P, the common parent of
a consolidated group, forms Newco in
Year 2 for the sole purpose of acquiring
T, in a merger with and into Newco. In
Year 3, there is a CNOL all of which is
attributable to Newco. Newco appears to
be within the scope of the offspring rule,
and therefore a carryback to P’s Year 1
consolidated return, a year before
Newco’s existence, would be permitted.
However, because the merger is a transaction to which section 381(a) applies,
Newco is also a successor to T. Under
this analysis, Newco would not be considered to have been a member of the P
group continuously since its organization,
so a carryback to the P group’s consolidated return year would not be permitted.
Moreover, Newco would not be permit-

1999–29 I.R.B.

ted to carryback the loss to any year of T.
Thus, no carryback of Newco’s loss would
be permitted.
The Treasury and the IRS believe that
the denial of any carryback in this situation is inappropriate. In general, a newlyformed group member should be permitted to carry back its contribution to the
consolidated net operating loss, whether
or not it is a successor to a corporation that
was acquired by the group. Moreover, the
Treasury and the IRS believe that rules
providing for a carryback within — rather
than outside — the group would be more
administrable than rules requiring taxpayers to trace the assets of a newly-formed
member to determine whether such corporation’s contribution to the consolidated
net operating loss should be carried back
to the pre-consolidation years of an acquired corporation or back within the
group. The Treasury and the IRS also
considered whether to provide that all consolidated net operating losses should be
carried back within the group, even if attributable to a corporation that was itself
acquired from outside the group. Whether
or not such a rule is appropriate, it was determined that such a change should not be
adopted in final regulations. Accordingly,
the final regulations provide that the offspring rule applies regardless of whether
the newly-formed member is a successor
to any other corporation.
Successor’s Income
Section 1.1502–21T(f)(2) of the temporary regulations provides, “Except as
the Commissioner may otherwise determine, any increase in the taxable income
of a SRLY subgroup that is attributable to
a successor is disregarded unless the successor acquires substantially all of the assets and liabilities of its predecessor and
the predecessor ceases to exist.” The rule
was intended to prevent the subgroup
from inappropriately affecting the determination of its taxable income either by
removing assets that would generate
losses or by bringing into the subgroup income generated by members outside the
subgroup.
Some commentators stated that they
did not understand whether the rule was
intended to require the subgroup to disregard all income of the successor, or only
that income of the successor in excess of

39

that generated by the transferred assets.
In the event that all the successor’s income is disregarded, commentators argued that the rule produced unduly harsh
results. A particularly sympathetic case is
a divisive section 351 transaction. For
example, if T, a member of a SRLY subgroup, formed T1, by contributing to it
one of its businesses, and T1 produced net
operating losses, those losses would be
included in determining the taxable income of the subgroup. On the other hand,
if T1 produced taxable income, that income would not be included in the subgroup’s taxable income. If no transfer to
T1 had occurred, and the business had remained in T, all of its income or loss, as
the case may be, would be included in determining the subgroup’s taxable income.
The Treasury and the IRS have determined that a broad rule disregarding all
income contributed by the successor is
necessary to avoid an unadministrable requirement that the successor’s income be
traced to particular assets, but that the rule
should only be applied in more limited
circumstances. Thus, the final regulations
provide that the net positive income attributable to the successor generally is
disregarded, but provide four exceptions
to this rule: (A) the successor acquires
substantially all of the assets and liabilities of its predecessor, and the predecessor ceases to exist; (B) the successor became a member of the SRLY subgroup at
the time the subgroup was formed (e.g.,
the successor was organized before it and
its affiliates joined the current group and
thus qualifies in its own right as a subgroup member); (C) 100 percent of the
stock of the successor is owned directly
by corporations that were members of the
SRLY subgroup when the subgroup was
formed; or (D) the Commissioner determines otherwise. The IRS might, for example, publish a revenue ruling or other
guidance expanding the list of exceptions
if it is later determined that other circumstances should be excluded from the general rule. It is also anticipated that
through the letter ruling process, the IRS
will evaluate individual cases upon request and determine whether income attributable to a successor will be included
in determining the subgroup’s taxable income. See also §1.1502–21(c)(2)(iv) of
the regulations (an anti-abuse rule deny-

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ing SRLY subgroup treatment in certain
circumstances.)
Built-in Losses
Non-Corporate Transferors
Section 1.1502–15T(a) of the temporary regulations provides that solely for
the purpose of determining the amount of,
and the extent to which, a built-in loss is
limited by the SRLY rules for the year in
which it is recognized, a built-in loss is
treated as a hypothetical net operating
loss carryover or net capital loss arising in
a SRLY, instead of as a deduction or loss
in the year recognized.
Some commentators thought the rule
was anomalous as applied to transfers of
built-in loss assets by individuals. In their
view, because a SRLY is defined only
with respect to corporations (see
§1.1502–1(f)), it would be inappropriate
to view a corporate transferee as a successor to a non-corporate transferor. Other
commentators asserted that because the
built-in loss concept is a subset of the
SRLY limitations, the built-in loss rules
should not apply to transfers by an individual or other non-corporate transferor to
a member of a consolidated group in a
section 351 transaction.
The temporary regulation does not base
the determination of whether a corporation has built-in losses on any application
of the predecessor and successor rule. If
an asset enters the group with a built-in
loss, in general, the temporary regulation
deems the built-in loss to have arisen in a
SRLY without regard to whether the asset
was owned by a corporation when the
built-in loss arose. Moreover, §1.1502–
15T(b)(2)(i) provides that in the case of
an asset acquisition by a group, the assets
and liabilities acquired directly from the
same transferor pursuant to the same plan
are treated as the assets and liabilities of a
corporation that becomes a member of the
group on the date of the acquisition. That
corporation would generally be subject to
the SRLY built-in loss rules when it becomes a member of the consolidated
group. The Treasury and the IRS continue to believe that a separate tax attribute arising outside the consolidated
group should not be freely absorbed
within the group, regardless of where that
separate attribute arose. Accordingly,
these final regulations reaffirm that a

July 19, 1999

built-in loss asset transferred to a group
by a non-corporate transferor is subject to
the SRLY rules. An example explains that
for purposes of applying the SRLY limitation to that built-in loss, all of the items
contributed by the acquiring member (and
not just items attributable to that asset) to
consolidated taxable income are taken
into account.
Lonely Parent
Under §1.1502–15T of the temporary
regulations, the SRLY limitation on recognized built-in losses applies to a loss
recognized by the group on an asset the
common parent held prior to the formation of a group. In contrast, net operating
loss carryovers of a corporation that becomes the common parent of a consolidated group are not subject to a SRLY
limitation within the group under the socalled “lonely parent” rule (see §1.1502–
1(f)(2)(i)).
The final regulations conform the builtin loss rules to the net operating loss rules
as applied in conjunction with the lonely
parent rule. Therefore, a loss recognized
by any member of the group on an asset
that was held by the corporation that becomes the common parent when the
group is formed is not subject to the
SRLY rules. However, a built-in loss
asset acquired by the common parent after
the formation of the group remains subject to the SRLY limitation. An antiabuse rule is also provided to apply the
SRLY limitation to built-in loss assets
transferred to a corporation prior to and in
anticipation of the corporation becoming
the common parent of a group.
For example, in Year 1, P, a stand alone
corporation holds Asset 1, a built-in loss
asset. In Year 3, P forms S but retains
Asset 1. In Year 4, P sells Asset 1, recognizing a loss. Section 1.1502–15(f) of the
final regulations provides that the loss is
not subject to the SRLY limitation. Similarly if P transferred Asset 1 with an unrealized built-in loss to S, the SRLY limitation on built-in losses would not apply if
S sold Asset 1 and recognized the loss.
However if, after the formation of the P/S
group, P acquired an asset with an unrealized built-in loss and sold the asset, recognizing that loss during the recognition
period, a SRLY limitation would apply
with respect to that loss.

40

Split Election Rule
Section 1.1502–21T(b)(3)(i) of the
temporary regulations permits a consolidated group to waive the entire carryback
period provided by section 172. This irrevocable election is not available on a
member by member basis, but rather requires that the common parent waive the
carryback period for all members of the
group.
Some commentators suggested that the
election be permitted on a member-bymember basis. The commentators expressed concern that requiring the whole
group to waive the carryback period
makes it difficult for sellers and purchasers to negotiate who gets the benefit
of a post-acquisition loss. Because section 172 generally requires a carryback to
the earliest year, absent the purchaser’s
waiver of the carryback, a seller could be
required to disclose confidential tax information to the purchaser relating to the
ability to use the loss carryback. In situations where such disclosure is a concern,
an election to waive the loss carryback,
available on a member by member basis,
could ensure the separation of a particular
purchaser and seller without requiring the
group to waive the remaining amount of
the consolidated net operating loss carryback.
The final regulations permit taxpayers
to waive, with respect to all consolidated
net operating losses attributable to a
member, the portion of the carryback period for which the corporation was a
member of another group. If an election
is made for any member, all members acquired from the same group, in the same
transaction, are required to make the election. The election must be made on the
timely filed original return for the year of
the acquisition.
Absorption of Losses
Section 1.1502–21T(b)(1) provides
general rules concerning the absorption of
losses within a consolidated group. Although the rules refer to section
382(l)(2)(B), commentators stated that
the absorption rules were ambiguous with
respect to establishing the priority of absorption of multiple losses carried from
the same taxable year if only a portion of
the losses were subject to limitation under

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section 382. The final regulations make
clear that the rule of section 382(l)(2)(B)
applies, and that losses limited by section
382 are absorbed before losses from the
same taxable year that are not subject to a
section 382 limitation, regardless of
whether such losses are attributable to the
same member.
A comment was also received requesting guidance on how to determine the
amount of a subgroup member’s net operating loss carryover that was absorbed so
that it can determine how much of the loss
it retains when it leaves the group. In response to this comment, the final regulations provide that within a subgroup,
losses are absorbed on a pro rata basis.
Thus, when a subgroup member leaves
the group, its net operating loss carryover
is treated as having been absorbed on a
pro rata basis, determined by comparing
its initial net operating loss carryover and
the subgroup’s initial net operating loss
carryover.
Dates of Applicability
The final regulations generally are applicable for taxable years for which the
due date (without extensions) of the consolidated return is after June 25, 1999.
However, there are several special effective dates, including an effective date
which addresses transitional issues relating to the adoption of the rule eliminating
SRLY in the event of an overlap with section 382. Generally, if a particular attribute would not have been subject to a
SRLY limitation as of June 25, 1999 if
these final regulations had always been in
effect, and the overlap transaction occurred after the effective date of section
382 as amended by the 1986 Tax Reform
Act, then the existing SRLY limitation
will not apply in taxable years for which
the due date (without extensions) of the
consolidated return is after June 25, 1999
(but will not be eliminated retroactively
with respect to earlier taxable years).
If an existing SRLY limitation for
which the cumulative register began in a
taxable year prior to a taxable year for
which the due date (without extensions)
of the consolidated return is after June 25,
1999 would not be eliminated by the
overlap rule, that SRLY limitation continues to be applied without regard to the
changes applicable to the definition of
SRLY subgroups (so that a member or

1999–29 I.R.B.

SRLY subgroup is not forced to alter the
application of a SRLY limitation in midstream). However, when corporations
enter a group in a new SRLY event occurring in a taxable year for which the due
date (without extensions) of the consolidated return is after June 25, 1999, the regulations apply (with respect to any overlap
transactions occurring after the effective
date of section 382 as amended by the
1986 Tax Reform Act) as if the final regulations had always been in effect.
Thus, for example, and assuming that
all corporations are on a calendar taxable
year, if a corporation S joins the P group
in an overlap transaction in 1996, and the
first year for which this final regulation is
effective is 1999, then any losses carried
by S into the P group are subject to a
SRLY limitation in 1996, 1997 and 1998.
However, the losses are no longer subject
to a SRLY limitation within the P group
starting in 1999.
If, in the above example, the M group
had acquired both P and S on January 1,
1998 in a non-overlap transaction, and S
carried into the M group its losses arising
before it joined the P group, then, in 1998,
under the temporary regulations as then in
effect, those S losses would have been
subject to a SRLY limitation computed
with reference only to S’s cumulative register. Under the special transition rule, the
new regulations would not operate in
1999 or thereafter to cause S and P to constitute a SRLY subgroup in the M group
with respect to those S losses, even
though P and S would otherwise qualify
as a SRLY subgroup with respect to those
losses under the new rules. However, if
the X group acquires both P and S from M
in or after 1999, P and S would constitute
a SRLY subgroup with respect to those S
loss carryovers.

decision subject to the effective date limitation of section 553(d) of title 5 of the
United States Code (if applicable).

Need for Immediate Guidance

Accordingly, 26 CFR parts 1, 301, and
602 are amended as follows:

Because the temporary regulations are
not applicable for taxable years ending
after June 26, 1999, it is necessary to implement these final regulations without
delay to ensure continuity of treatment of
certain attributes and to ensure that there
is no period within which the treatment of
such attributes is inconsistent with the
temporary regulations and these final regulations. See section 7805(e)(2). Accordingly, it is impracticable and contrary to
the public interest to issue this Treasury

41

Special Analyses
It has been determined that this Treasury decision is not a significant regulatory action as defined in EO 12866. It is
hereby certified that these regulations will
not have a significant economic impact on
a substantial number of small entities.
This certification is based on the fact that
these regulations principally affect corporations filing consolidated federal income
tax returns that have carryover or carryback of certain losses from separate return
limitation years. Available data indicates
that many consolidated return filers are
large companies (not small businesses).
In addition, the data indicates that an insubstantial number of consolidated return
filers that are smaller companies have loss
carryovers or carrybacks that are subject
to the separate return limitation year
rules. Therefore, a Regulatory Flexibility
Analysis under the Regulatory Flexibility
Act (5 U.S.C. chapter 6) is not required.
Pursuant to section 7805(f) of the Code,
the notice of proposed rulemaking preceding these regulations was sent to the
Small Business Administration for comment on its impact on small businesses.
Drafting Information
The principal author of these regulations is Jeffrey L. Vogel of the Office of
Assistant Chief Counsel (Corporate), IRS.
Other personnel from the Treasury and
the IRS participated in their development.
* * * * *
Adoption of Amendments to the
Regulations

PART 1—INCOME TAXES
Paragraph 1. The authority citation for
part 1 is amended by removing the entries
for sections 1.1502–15T, 1.1502–21T,
1.1502–22T, and 1.1502–23T and adding
entries in numerical order to read in part
as follows:
Authority: 26 U.S.C. 7805 * * *
Section 1.1502–12 also issued under 26
U.S.C. 1502.* * *

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Section 1.1502–15 also issued under 26
U.S.C. 1502.* * *
Section 1.1502–22 also issued under 26
U.S.C. 1502.

Section 1.1502–23 also issued under 26
U.S.C. 1502.* * *
Par. 2. In the list below, for each section indicated in the left column, remove

the wording indicated in the middle column, and add the wording indicated in the
right column.

Affected Section

Remove

Add

1.469–1(h)(2)

1.1502–21T (net operating losses
(temporary)), and 1.1502–22T
(consolidated net capital gain and
loss (temporary))

1.1502–21 (net operating losses), and
1.1502–22 (consolidated net capital
gain and loss)

1.597–2(c)(5), first sentence

1.1502–15T, 1.1502–21T, and 1.1502–22T

1.1502–15, 1.1502–21, and 1.1502–22

1.597–2(c)(5), second sentence

1.1502–15T, 1.1502–21T or 1.1502–22T

1.1502–15, 1.1502–21 or 1.1502–22

1.597–4(g)(3), fifth sentence

1.1502–15T, 1.1502–21T and 1.1502–22T

1.1502–15, 1.1502–21 and 1.1502–22

1.597–4(g)(3), sixth sentence

1.1502–15T, 1.1502–21T, or 1.1502–22T

1.1502–15, 1.1502–21, or 1.1502–22

1.904(f)–3(a), first sentence

(or §1.1502–21T(b)

(or §1.1502–21(b)

1.904(f)–3(b), first sentence

(or §1.1502–22T(b)

(or §1.1502–22(b)

1.1502–2(h)

1.1502–22T)(or, for consolidated return
years to which §1.1502–22T

1.1502–22)(or, for consolidated return
years to which §1.1502–22

1.1502–3T(c)(2)(iii), first sentence

1.1502–21T(c)(2)

1.1502–21(c)(2)

1.1502–3T(c)(2)(iii), second sentence

1.1502–21T(f)

1.1502–21(f)

1.1502–9(a), seventh sentence

§1.1502–21T(b)(2)

1.1502–21(b)(2)

1.1502–9(a), eighth sentence

1.1502–21T(b)(1)

1.1502–21(b)(1)

1.1502–11(a)(2)

§1.1502–21T

1.1502–21

1.1502–11(a)(3)

§1.1502–22T

1.1502–22

1.1502–11(a)(4)

§1.1502–23T

1.1502–23

1.1502–11(b)(2)(iii) Example 1(c),
last sentence

1.1502–21T

1.1502–21

1.1502–11(b)(2)(iii) Example 2(d),
last sentence

1.1502–21T and 1.1502–22T

1.1502–21 and 1.1502–22

1.1502–12(b)

1.1502–15T

1.1502–15

1.1502–13(c)(7)(ii) Example 10(d),
first and second sentences

S’s net operating loss carryovers are
subject to the separate return limitation
year (SRLY) rules. See §1.1502–21T(c)

P’s acquisition of S is not subject to the
overlap rule of §1.1502–21(g), and S’s
net operating loss carryovers are subject
to the separate return limitation year
(SRLY) rules. See §1.1502–21(c)

1.1502–13(g)(5) Example 4(b),
fourth sentence

1.1502–15T (or §1.1502–15A, as appropriate) (limitations on the absorption of
built in losses)

1.1502–15 (as appropriate)

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42

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1.1502–13(h)(2) Example 1(a),
second sentence

1.1502–21T(c)

1.1502–21(c)

1.1502–13(h)(2) Example 1(b),
first sentence

1.1502–21T(c)

1.1502–21(c)

1.1502–13(h)(2) Example 2(a),
last sentence

1.1502–15T

1.1502–15

1.1502–13(h)(2) Example 2(b),
second sentence

1.1502–22T

1.1502–22

1.1502–20(c)(4) Example 7(iii),
first sentence

1.1502–21T

1.1502–21

1.1502–20(g)(3) Example 1(i),
second sentence

1.1502–21T

1.1502–21

1.1502–20(g)(3) Example 2(i),
third sentence

§1.1502–21A or 1.1502–21T

1.1502–21A or 1.1502–21

1.1502–23A(a), third sentence

1.1502–21T(c) and 1.1502–22T(c), as
provided in 1.1502–15T(a)

(1.1502–21T(c) in effect prior to June
25, 1999, as contained in 26 CFR part 1
revised April 1, 1999 and 1.1502–22T(c)
in effect prior to June 25, 1999, as contained in 26 CFR part 1 revised April 1,
1999, as provided in 1.1502–15T(a) in
effect prior to June 25, 1999, as contained in 26 CFR part 1 revised April 1,
1999) or (1.1502–21(c) and 1.1502–
22(c), as provided in 1.1502–15(a), as
applicable))

1.1502–23A(b), first sentence

1.1502–21T(g)

1.1502–21(h) or 1.1502–21T(g) in effect
prior to June 25, 1999, as contained in
26 CFR part 1 revised April 1, 1999, as
applicable

1.1502–23A(b), second sentence

1.1502–21T(g) for effective dates of
that section

1.1502–21(h) or 1.1502–21T(g) in effect
prior to June 25, 1999, as contained in
26 CFR part 1 revised April 1, 1999, as
applicable for effective dates of these
sections

1.1502–26(a)(1) concluding text

1.1502–21T(e)

1.1502–21(e)

1.1502–32(b)(5)(ii) Example 2(b),
third sentence

1.1502–21T(b)

1.1502–21(b)

1.1502–41A(c), first sentence

1.1502–21T(g)

1.1502–21(h) or 1.1502–21T(g) in effect
prior to June 25, 1999, as contained in
26 CFR part 1 revised April 1, 1999, as
applicable

1.1502–41A(c), second sentence

1.1502–21T(g) for effective dates of
that section

1.1502–21(h) or 1.1502–21T(g) in effect
prior to June 25, 1999, as contained in
26 CFR part 1 revised April 1, 1999, as
applicable for effective dates of these
sections

1999–29 I.R.B.

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1.1502–42(f)(4)(i)(A)

1.1502–21T(b)

1.1502–21(b)

1.1502–43(b)(2)(iv)

1.1502–21T(a)

1.1502–21(a)

1.1502–43(b)(2)(v)

1.1502–22T(a)

1.1502–22(a)

1.1502–43(b)(2)(vi)(A)

1.1502–22T(a)

1.1502–22(a)

1.1502–43(b)(2)(vii)

1.1502–22T(b)

1.1502–22(b)

1.1502–43(b)(2)(viii)

1.1502–15T) and 1.1502–15T (SRLY
limitation on built–in losses (temporary))

1.1502–15) and 1.1502–15

1.1502–44(b)(2)

§1.1502–21T

1.1502–21

1.1502–44(b)(3)

§1.1502–22T

1.1502–22

1.1502–47(h)(2)(i)

1.1502–21T

1.1502–21

1.1502–47(h)(2)(ii)

1.1502–21T(e)

1.1502–21(e)

1.1502–47(h)(2)(iii),first sentence

1.1502–21T

1.1502–21

1.1502–47(h)(2)(iv), first sentence

1.1502–21T

1.1502–21

1.1502–47(h)(3)(iii)

1.1502–21T(c)

1.1502–21(c)

1.1502–47(h)(4)(i), first sentence

1.1502–22T

1.1502–22

1.1502–47(h)(4)(i), second sentence

1.1502–22T

1.1502–22

1.1502–47(h)(4)(ii), first sentence

1.1502–22T

1.1502–22

1.1502–47(h)(4)(ii), first sentence

1.1502–21T

1.1502–21

1.1502–47(h)(4)(iii)

1.1502–22T(b)

1.1502–22(b)

1.1502–47(k)(5) introductory text

1.1502–22T

1.1502–22

1.1502–47(l)(3)(i), second sentence

1.1502–21T

1.1502–21

1.1502–47(m)(2)(ii), first sentence

1.1502–21T

1.1502–21

1.1502–47(m)(2)(ii), first sentence

1.1502–22T

1.1502–22

1.1502–47(m)(3)(i), first sentence

1.1502–21T and 1.1502–22T

1.1502–21 and 1.1502–22

1.1502–47(m)(3)(vi)(A),
second sentence

1.1502–21T(b) or 1.1502–79A(a)(3)
(as appropriate)

1.1502–21(b))

1.1502–47(m)(3)(vi)(A),
second sentence

§1.1502–21T(b) or 1.1502–79A(a)(3)
(as appropriate)

1.1502–21(b)

1.1502–47(m)(3)(vii)(A)

1.1502–21A(b)(3)(ii)

1.1502–21A(b)(3)(ii) or 1.1502–21(b)

1.1502–47(m)(3)(ix), last sentence

1.1502–15T

1.1502–15

1.1502–47(q), last sentence

1.1502–21T

1.1502–21

1.1502–55T(h)(4)(iii)
(B)(4), first sentence

1.1502–21T(c)(2)

1.1502–21(c)(2)

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1.1502–55T(h)(4)(iii)
(B)(4), second sentence

1.1502–21T(f)

1.1502–21(f)

1.1502–78(a), first sentence

1.1502–21T(b), 1.1502–22T(b)

1.1502–21(b), 1.1502–22(b)

1.1502–79(a), second sentence

1.1502–21T(b)

1.1502–21(b)

1.1502–79(b), second sentence

1.1502–22T(b)

1.1502–22(b)

1.1502–79(c)(1)

1.1502–21T(b)

1.1502–21(b)

1.1502–79(d)(1)

1.1502–21T(b)

1.1502–21(b)

1.1502–79(e)(1)

1.1502–21T(b)

1.1502–21(b)

1.1502–91T(a)(2), last sentence

1.1502–21T(a)

1.1502–21(a) or 1.1502–21T(a) in effect
prior to June 25, 1999, as contained in
26 CFR part 1 revised April 1, 1999, as
applicable

1.1502–91T(c)(3) Example (b),
first sentence

1.1502–21T(c)

1.1502–21(c) or 1.1502–21T(c) in effect
prior to June 25, 1999, as contained in
26 CFR part 1 revised April 1, 1999, as
applicable

1.1502–91T(d)(1)(iii)

1.1502–21T(c)

1.1502–21(c) or 1.1502–21T(c) in effect
prior to June 25, 1999, as contained in
26 CFR part 1 revised April 1, 1999, as
applicable

1.1502–91T(d)(6) Example 1(a),
fourth sentence

1.1502–21T(b)

1.1502–21(b) or 1.1502–21T(b) in effect
prior to June 25, 1999, as contained in
26 CFR part 1 revised April 1, 1999, as
applicable

1.1502–91T(d)(6) Example 2(a),
fourth sentence

1.1502–21T(b)

1.1502–21(b) or 1.1502–21T(b) in effect
prior to June 25, 1999, as contained in
26 CFR part 1 revised April 1, 1999, as
applicable

1.1502–91T(f)(2) Example (a),
last sentence

1.1502–21T(b)

1.1502–21(b) or 1.1502–21T(b) in effect
prior to June 25, 1999, as contained in
26 CFR part 1 revised April 1, 1999, as
applicable

1.1502–92T(b)(2) Example 3(a),
fourth sentence

1.1502–21T(b)

1.1502–21(b) or 1.1502–21T(b) in effect
prior to June 25, 1999, as contained in
26 CFR part 1 revised April 1, 1999, as
applicable

1.1502–93T(e)

1.1502–21T(c)

1.1502–21(c) or 1.1502–21T(c) in effect
prior to June 25, 1999, as contained in
26 CFR part 1 revised April 1, 1999, as
applicable

1.1502–94T(a)(1)(i)

1.1502–21T(c)

1.1502–21(c) or 1.1502–21T(c) in effect
prior to June 25, 1999, as contained in
26 CFR part 1 revised April 1, 1999, as
applicable

1999–29 I.R.B.

45

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Page 46

1.1502–94T(b)(4) Example 1(c),
last sentence

1.1502–21T(c)

1.1502–21(c) or 1.1502–21T(c) in effect
prior to June 25, 1999, as contained in
26 CFR part 1 revised April 1, 1999, as
applicable

1.1502–95T(b)(1)(i)

1.1502–21T(b)

1.1502–21(b) or 1.1502–21T(b) in effect
prior to June 25, 1999, as contained in
26 CFR part 1 revised April 1, 1999, as
applicable

1.1502–95T(b)(4) Example 1(a),
sixth sentence

1.1502–21T(b)

1.1502–21(b) or 1.1502–21T(b) in effect
prior to June 25, 1999, as contained in
26 CFR part 1 revised April 1, 1999, as
applicable

1.1502–95T(c)(7) Example 1(a),
fifth sentence

1.1502–21T(b)

1.1502–21(b) or 1.1502–21T(b) in effect
prior to June 25, 1999, as contained in
26 CFR part 1 revised April 1, 1999, as
applicable

1.1502–96T(a)(1) introductory text
sixth sentence

1.1502–21T(c)

1.1502–21(c) or 1.1502–21T(c) in effect
prior to June 25, 1999, as contained in
26 CFR part 1 revised April 1, 1999, as
applicable

1.1502–96T(a)(2), first sentence

1.1502–21T(c)

1.1502–21(c) or 1.1502–21T(c) in effect
prior to June 25, 1999, as contained in
26 CFR part 1 revised April 1, 1999, as
applicable

1.1502–96T(a)(5), first sentence

1.1502–15T and 1.1502–21T

1.1502–15 and 1.1502–21 (or §1.1502–
15T in effect prior to June 25, 1999, as
contained in 26 CFR part 1 revised April
1, 1999 and 1.1502–21T in effect prior
to June 25, 1999, as contained in 26
CFR part 1 revised April 1, 1999, as
applicable)

1.1502–96T(b)(2)(ii)(A)

1.1502–21T(b)

1.1502–21(b) or 1.1502–21T(b) in effect
prior to June 25, 1999, as contained in
26 CFR part 1 revised April 1, 1999, as
applicable

1.1502–96T(b)(2)(ii)(B)

1.1502–21T(c)

1.1502–21(c) or 1.1502–21T(c) in effect
prior to June 25, 1999, as contained in
26 CFR part 1 revised April 1, 1999, as
applicable

1.1502–99T(c)(2)(i), fourth sentence

1.1502–21T(c)

1.1502–21(c) or 1.1502–21T(c) in effect
prior to June 25, 1999, as contained in
26 CFR part 1 revised April 1, 1999, as
applicable

1.1502–99T(c)(2)(ii)

1.1502–21T(b)

1.1502–21(b) or 1.1502–21T(b) in effect
prior to June 25, 1999, as contained in
26 CFR part 1 revised April 1, 1999, as
applicable

1.1502–100(c)(2)

§§1.1502–21A or 1.1502–21T

§1.1502–21A or 1.1502–21

July 19, 1999

46

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Page 47

1.1503–2(d)(2)(i), last sentence

§1.1502–21A(c) or 1.1502–21T(c)

1.1502–21A(c) or 1.1502–21(c)

1.1503–2(d)(2)(ii), last sentence

§1.1502–21A(c) or 1.1502–21T(c)

1.1502–21A(c) or 1.1502–21(c)

1.1503–2(d)(4) Example 1 (iv),
last sentence

1.1502–22T(c)

1.1502–22(c)

1.1503–2(g)(2)(vii)(B)(1),
second sentence

§1.1502–21A(c) or 1.1502–21T(c)

1.1502–21A(c) or 1.1502–21(c)

1.1503–2(g)(2)(vii)(B)(2),
first sentence

§1.1502–21A(c) or 1.1502-21T(c)

1.1502–21A(c) or 1.1502–21(c)

1.1503–2(g)(2)(vii)(G) Example 1,
ninth sentence

§1.1502–21A(c) or 1.1502–21T(c)

1.1502–21A(c) or 1.1502–21(c)

1.1503–2(g)(2)(vii)(G) Example 2,
last sentence

§§1.1502–21A(c) or 1.1502–21T(c)

§1.1502–21A(c) or 1.1502–21(c)

1.1503–2(h)(3), second sentence

§§1.1502–21A(c) or 1.1502–21T(c))

(§1.1502–21A(c) or 1.1502–21(c)

1.1503–2A(f)(1)(i) introductory text

1.1502–21T(b)

1.1502–79A(a)(3)

1.1503–2A(f)(1)(i)(C)

1.1502–22T(b)

1.1502–22

1.1503–2A(f)(2)(i), fourth sentence

1.1502–21T(c)

1.1502–21(c)

1.1503–2A(f)(2)(ii), last sentence

1.1502–21T(c)

1.1502–21(c)

301.6402–7(g)(2)(iii), first sentence

§1.1502–21T(b)

1.1502–21(b)

301.6402–7(g)(3) Example 2,
second sentence

1.1502–21T

1.1502–21

301.6402–7(g)(3) Example 2,
third sentence

1.1502–21T(c)

1.1502–21(c)

301.6402–7(h)(1)(ii) Example (b),
first sentence

1.1502–21T(b) and 1.1502–22T(b)

1.1502–21(b) and 1.1502–22(b)

that occurs before June 25, 1999, only if
the amount by which basis differs from
value, in the aggregate, is material. For a
transaction that occurs before June 25,
1999, only one member may be considered a predecessor to or a successor of
one other member.

an overlap with section 382), built-in
losses are subject to the SRLY limitation
under §§1.1502–21(c) and 1.1502–22(c)
(including applicable subgroup principles). Built-in losses are treated as deductions or losses in the year recognized, except for the purpose of determining the
amount of, and the extent to which the
built-in loss is limited by, the SRLY limitation for the year in which it is recognized. Solely for such purpose, a built-in
loss is treated as a hypothetical net operating loss carryover or net capital loss carryover arising in a SRLY, instead of as a
deduction or loss in the year recognized.
To the extent that a built-in loss is allowed
as a deduction under this section in the
year it is recognized, it offsets any consolidated taxable income for the year before

Par. 3. Section 1.1502–1 is amended
by revising paragraph (f)(4) to read as follows:
§1.1502–1 Definitions.
* * * * *
(f) * * *
(4) Predecessor and successors. The
term predecessor means a transferor or
distributor of assets to a member (the successor) in a transaction(i) To which section 381(a) applies; or
(ii) That occurs on or after January 1,
1997, in which the successor’s basis for
the assets is determined, directly or indirectly, in whole or in part, by reference to
the basis of the assets of the transferor or
distributor, but in the case of a transaction

1999–29 I.R.B.

* * * * *
Par. 4. Section 1.1502–15 is added to
read as follows:
§1.1502–15 SRLY limitation on built-in
losses.
(a) SRLY limitation. Except as provided
in paragraph (f) of this section (relating to
built-in losses of the common parent) and
paragraph (g) of this section (relating to

47

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Page 48

any loss carryovers or carrybacks are allowed as a deduction. To the extent not so
allowed, it is treated as a separate net operating loss or net capital loss carryover
or carryback arising in the year of recognition and, under §1.1502–21(c) or
1.1502–22(c), the year of recognition is
treated as a SRLY.
(b) Built-in losses—(1) Defined. If a
corporation has a net unrealized built-in
loss under section 382(h)(3) (as modified
by this section) on the day it becomes a
member of the group (whether or not the
group is a consolidated group), its deductions and losses are built-in losses under
this section to the extent they are treated
as recognized built-in losses under section
382(h)(2)(B) (as modified by this section). This paragraph (b) generally applies separately with respect to each
member, but see paragraph (c) of this section for circumstances in which it is applied on a subgroup basis.
(2) Operating rules. Solely for purposes of applying paragraph (b)(1) of this
section, the principles of §1.1502–94(c)
apply with appropriate adjustments, including the following:
(i) Stock acquisition. A corporation is
treated as having an ownership change
under section 382(g) on the day the corporation becomes a member of a group,
and no other events (e.g., a subsequent
ownership change under section 382(g)
while it is a member) are treated as causing an ownership change.
(ii) Asset acquisition. In the case of an
asset acquisition by a group, the assets
and liabilities acquired directly from the
same transferor (whether corporate or
non-corporate, foreign or domestic) pursuant to the same plan are treated as the
assets and liabilities of a corporation that
becomes a member of the group (and has
an ownership change) on the date of the
acquisition.
(iii) Recognized built-in gain or loss. A
loss that is included in the determination
of net unrealized built-in gain or loss and
that is recognized but disallowed or deferred (e.g., under §1.1502–20 or section
267) is not treated as a built-in loss unless
and until the loss would be allowed during the recognition period without regard
to the application of this section. Section
382(h)(1)(B)(ii) does not apply to the extent it limits the amount of recognized
built-in loss that may be treated as a pre-

July 19, 1999

change loss to the amount of the net unrealized built-in loss.
(c) Built-in losses of subgroups—(1) In
general. In the case of a subgroup, the
principles of paragraph (b) of this section
apply to the subgroup, and not separately
to its members. Thus, the net unrealized
built-in loss and recognized built-in loss
for purposes of paragraph (b) of this section are based on the aggregate amounts
for each member of the subgroup.
(2) Members of subgroups. A subgroup
is composed of those members that have
been continuously affiliated with each
other for the 60 consecutive month period
ending immediately before they become
members of the group in which the loss is
recognized. A member remains a member
of the subgroup until it ceases to be affiliated with the loss member. For this purpose, the principles of §1.1502–21(c)(2)(iv) through (vi) apply with appropriate
adjustments.
(3) Coordination of 60 month affiliation requirement with the overlap rule. If
one or more corporations become members of a group and are included in the determination of a net unrealized built-in
loss that is subject to the overlap rule described in paragraph (g)(1) of this section,
then for purposes of paragraph (c)(2) of
this section, such corporations that become members of the group are treated as
having been affiliated for 60 consecutive
months with the common parent of the
group and are also treated as having been
affiliated with any other members who
have been affiliated or are treated as having been affiliated with the common parent at such time. The corporations are
treated as having been affiliated with such
other members for the same period of
time that those members have been affiliated or are treated as having been affiliated with the common parent. If two or
more corporations become members of
the group at the same time, but this paragraph (c)(3) does not apply to every such
corporation, then immediately after the
corporations become members of the
group, and solely for purposes of paragraph (c)(2) of this section, the corporations to which this paragraph (c)(3) applies are treated as having not been
previously affiliated with the corporations
to which this paragraph (c)(3) does not
apply. If the common parent has become
the common parent of an existing group

48

within the previous five year period in a
transaction described in §1.1502–75(d)(2)(ii) or (3), the principles of §§1.1502–
91(g)(6) and 1.1502–96(a)(2)(iii) shall
apply.
(4) Built-in amounts. Solely for purposes of determining whether the subgroup has a net unrealized built-in loss or
whether it has a recognized built-in loss,
the principles of §1.1502–91(g) and (h)
apply with appropriate adjustments.
(d) Examples. For purposes of the examples in this section, unless otherwise
stated, all groups file consolidated returns, all corporations have calendar taxable years, the facts set forth the only corporate activity, value means fair market
value and the adjusted basis of each asset
equals its value, all transactions are with
unrelated persons, and the application of
any limitation or threshold under section
382 is disregarded. The principles of this
section are illustrated by the following examples:
Example 1. Determination of recognized built-in
loss. (i) Individual A owns all of the stock of P and
T. T has two depreciable assets. Asset 1 has an unrealized loss of $55 (basis $75, value $20), and asset 2
has an unrealized gain of $20 (basis $30, value $50).
P acquires all the stock of T from Individual A during Year 1, and T becomes a member of the P group.
P’s acquisition of T is not an ownership change as
defined by section 382(g). Paragraph (g) of this section does not apply because there is not an overlap
of the application of the rules contained in paragraph
(a) of this section and section 382.
(ii) Under paragraph (b)(2)(i) of this section, and
solely for purposes of applying paragraph (b)(1) of
this section, T is treated as having an ownership
change under section 382(g) on becoming a member
of the P group. Under paragraph (b)(1) of this section, none of T’s $55 of unrealized loss is treated as
a built-in loss unless T has a net unrealized built-in
loss under section 382(h)(3) on becoming a member
of the P group.
(iii) Under section 382(h)(3)(A), T has a $35 net
unrealized built-in loss on becoming a member of
the P group (($55) + $20 = ($35)). Assume that this
amount exceeds the threshold requirement in section
382(h)(3)(B). Under section 382(h)(2)(B), the entire amount of T’s $55 unrealized loss is treated as a
built-in loss to the extent it is recognized during the
5-year recognition period described in section
382(h)(7). Under paragraph (b)(2)(iii) of this section, the restriction under section 382(h)(1)(B)(ii),
which limits the amount of recognized built-in loss
that is treated as pre-change loss to the amount of
the net unrealized built-in loss, is inapplicable for
this purpose. Consequently, the entire $55 of unrealized loss (not just the $35 net unrealized loss) is
treated under paragraph (b)(1) of this section as a
built-in loss to the extent it is recognized within 5
years of T’s becoming a member of the P group.
Under paragraph (a) of this section, a built-in loss is

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subject to the SRLY limitation under §1.1502–
21(c)(1).
(iv) Under paragraph (b)(2)(ii) of this section, the
built-in loss would similarly be subject to a SRLY
limitation under §1.1502–21(c)(1) if T transferred
all of its assets and liabilities to a subsidiary of the P
group in a single transaction described in section
351. To the extent the built-in loss is recognized
within 5 years of T’s transfer, all of the items contributed by the acquiring subsidiary to consolidated
taxable income (and not just the items attributable to
the assets and liabilities transferred by T) are included for purposes of determining the SRLY limitation under §1.1502–21(c)(1).
Example 2. Actual application of section 382 not
relevant. (i) Individual A owns all of the stock of P,
and Individual B owns all of the stock of T. T has
two depreciable assets. Asset 1 has an unrealized
loss of $25 (basis $75, value $50), and asset 2 has an
unrealized gain of $20 (basis $30, value $50). P buys
55 percent of the stock of T in January of Year 1, resulting in an ownership change of T under section
382(g). During March of Year 2, P buys the 45 percent balance of the T stock, and T becomes a member of the P group.
(ii) Although T has an ownership change for purposes of section 382 in Year 1 and not Year 2, T’s
joining the P group in Year 2 is treated as an ownership change under section 382(g) solely for purposes
of this section. Consequently, for purposes of this
section, whether T has a net unrealized built-in loss
under section 382(h)(3) is determined as if the day T
joined the P group were a change date.
Example 3. Determination of a recognized builtin loss of a subgroup. (i) Individual A owns all of the
stock of P, S, and M. P and M are each common parents of a consolidated group. During Year 1, P acquires all of the stock of S from Individual A, and S
becomes a member of the P group. P’s acquisition of
S is not an ownership change as defined by section
382(g). At the beginning of Year 7, M acquires all of
the stock of P from Individual A, and P and S become members of the M group. M’s acquisitions of
P and S are also not ownership changes as defined
by section 382(g). At the time of M’s acquisition of
the P stock, P has (disregarding the stock of S) a $10
net unrealized built-in gain (two depreciable assets,
asset 1 with a basis of $35 and a value of $55, and
asset 2 with a basis of $55 and a value of $45), and S
has a $75 net unrealized built-in loss (two depreciable assets, asset 3 with a basis of $95 and a value of
$10, and asset 4 with a basis of $10 and a value of
$20).
(ii) Under paragraph (c) of this section, P and S
compose a subgroup on becoming members of the
M group because P and S were continuously affiliated for the 60 month period ending immediately before they became members of the M group. Consequently, paragraph (b) of this section does not apply
to P and S separately. Instead, their separately computed unrealized gains and losses are aggregated for
purposes of determining whether, and the extent to
which, any unrealized loss is treated as built-in loss
under this section and is subject to the SRLY limitation under §1.1502–21(c).
(iii) Under paragraph (c) of this section, the P
subgroup has a net unrealized built-in loss on the
day P and S become members of the M group, determined by treating the day they become members as
a change date. The net unrealized built-in loss is the

1999–29 I.R.B.

aggregate of P’s net unrealized built-in gain of $10
and S’s net unrealized built-in loss of $75, or an aggregate net unrealized built-in loss of $65. (The
stock of S owned by P is disregarded for purposes of
determining the net unrealized built-in loss. However, any loss allowed on the sale of the stock within
the recognition period is taken into account in determining recognized loss.) Assume that the $65 net
unrealized built-in loss exceeds the threshold requirement under section 382(h)(3)(B).
(iv) Under paragraphs (b)(1), (b)(2)(iii), and (c)
of this section, a loss recognized during the 5-year
recognition period on an asset of P or S held on the
day that P and S became members of the M group is
a built-in loss except to the extent the group establishes that such loss exceeds the amount by which
the adjusted basis of such asset on the day the member became a member exceeded the fair market
value of such asset on that same day. If P sells asset
2 for $45 in Year 7 and recognizes a $10 loss, the entire $10 loss is treated as a built-in loss under paragraphs (b)(2)(iii) and (c) of this section. If S sells
asset 3 for $10 in Year 7 and recognizes an $85 loss,
the entire $85 loss is treated as a built-in loss under
paragraphs (b)(2)(iii) and (c) of this section (not just
the $55 balance of the P subgroup’s $65 net unrealized built-in loss).
(v) The determination of whether P and S constitute a SRLY subgroup for purposes of loss carryovers and carrybacks, and the extent to which builtin losses are not allowed under the SRLY limitation,
is made under §1.1502–21(c).
Example 4. Computation of SRLY limitation. (i)
Individual A owns all of the stock of P, the common
parent of a consolidated group. During Year 1, Individual A forms T by contributing $300 and T sustains a $100 net operating loss. During Year 2, T’s
assets decline in value to $100. At the beginning of
Year 3, P acquires all the stock of T from Individual
A, and T becomes a member of the P group with a
net unrealized built-in loss of $100. P’s acquisition
of T is not an ownership change as defined by section 382(g). Assume that $100 exceeds the threshold
requirements of section 382(h)(3)(B). During Year
3, T recognizes its unrealized built-in loss as a $100
ordinary loss. The members of the P group contribute the following net income to the consolidated
taxable income of the P group (disregarding T’s recognized built-in loss and any consolidated net operating loss deduction under §1.1502–21) for Years 3
and 4:

P group
(without T)
T
CT

Year 3
$100

Year 4
$100

Total
$200

$60
$160

$40
$140

$100
$300

(ii) Under paragraph (b) of this section, T’s $100
ordinary loss in Year 3 (not taken into account in the
consolidated taxable income computations above) is
a built-in loss. Under paragraph (a) of this section,
the built-in loss is treated as a net operating loss carryover for purposes of determining the SRLY limitation under §1.1502–21(c).
(iii) For Year 3, §1.1502–21(c) limits T’s $100
built-in loss and $100 net operating loss carryover
from Year 1 to the aggregate of the P group’s consolidated taxable income through Year 3, determined
by reference to only T’s items. For this purpose, con-

49

solidated taxable income is determined without regard to any consolidated net operating loss deductions under §1.1502–21(a).
(iv) The P group’s consolidated taxable income
through Year 3 is $60 when determined by reference
to only T’s items. Under §1.1502–21(c), the SRLY
limitation for Year 3 is therefore $60.
(v) Under paragraph (a) of this section, the $100
built-in loss is treated as a current deduction for all
purposes other than determination of the SRLY limitation under §1.1502–21(c). Consequently, a deduction for the built-in loss is allowed in Year 3 before
T’s loss carryover from Year 1 is allowed, but only
to the extent of the $60 SRLY limitation. None of
T’s Year 1 loss carryover is allowed because the
built-in loss ($100) exceeds the SRLY limitation for
Year 3.
(vi) The $40 balance of the built-in loss that is
not allowed in Year 3 because of the SRLY limitation is treated as a $40 net operating loss arising in
Year 3 that is carried to other years in accordance
with the rules of §1.1502–21(b). The $40 net operating loss is treated under paragraph (a) of this section
and §1.1502–21(c)(1)(ii) as a loss carryover or carryback from Year 3 that arises in a SRLY, and is subject to the rules of §1.1502–21 (including
§1.1502–21(c)) rather than this section. See also
§1.1502–21(c)(1)(iii) Example 4.
(vii) The facts are the same as in paragraphs (i)
through (vi) of this Example 4, except that T has an
additional built-in loss when it joins the P group
which is recognized in Year 4. For purposes of determining the SRLY limitation for these additional
losses in Year 4 (or any subsequent year), the $60 of
built-in loss allowed as a deduction in Year 3 is
treated under paragraph (a) of this section as a deduction in Year 3 that reduces the P group’s consolidated taxable income when determined by reference
to only T’s items.
Example 5. Built-in loss exceeding consolidated
taxable income in the year recognized. (i) Individual
A owns all of the stock of P and T. During Year 1, P
acquires all the stock of T from Individual A, and T
becomes a member of the P group. P’s acquisition of
T was not an ownership change as defined by section 382(g). At the time of acquisition, T has a noncapital asset with an unrealized loss of $45 (basis
$100, value $55), which exceeds the threshold requirements of section 382(h)(3)(B). During Year 2,
T sells its asset for $55 and recognizes the unrealized built-in loss. The P group has $10 of consolidated taxable income in Year 2, computed by disregarding T’s recognition of the $45 built-in loss and
the consolidated net operating loss deduction, while
the consolidated taxable income would be $25 if determined by reference to only T’s items (other than
the $45 loss).
(ii) T’s $45 loss is recognized in Year 2 and,
under paragraph (b) of this section, constitutes a
built-in loss. Under paragraph (a) of this section and
§1.1502–21(c)(1)(ii), the loss is treated as a net operating loss carryover to Year 2 for purposes of applying the SRLY limitation under §1.1502–21(c).
(iii) For Year 2, T’s SRLY limitation is the aggregate of the P group’s consolidated taxable income
through Year 2 determined by reference to only T’s
items. For this purpose, consolidated taxable income
is determined by disregarding any built-in loss that
is treated as a net operating loss carryover, and any
consolidated net operating loss deductions under

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§1.1502–21(a). Consolidated taxable income so determined is $25.
(iv) Under §1.1502–21(c), $25 of the $45 built-in
loss could be deducted in Year 2. Because the P
group has only $10 of consolidated taxable income
(determined without regard to the $45), the $25 loss
creates a consolidated net operating loss of $15. This
loss is carried back or forward under the rules of
§1.1502–21(b) and absorbed under the rules of
§1.1502–21(a). This loss is not treated as arising in a
SRLY (see §1.1502–21(c)(1)(ii)) and therefore is not
subject to the SRLY limitation under §1.1502–21(c)
in any consolidated return year of the group to
which it is carried. The remaining $20 is treated as a
loss carryover arising in a SRLY and is subject to the
limitation of §1.1502–21(c) in the year to which it is
carried.

(e) Predecessors and successors. For
purposes of this section, any reference to
a corporation or member includes, as the
context may require, a reference to a successor or predecessor, as defined in
§1.1502–1(f)(4).
(f) Built-in losses recognized by common parent of group—(1) General rule.
Paragraph (a) of this section does not
apply to any loss recognized by the group
on an asset held by the common parent on
the date the group is formed. Following
an acquisition described in §1.1502–
75(d)(2) or (3), references to the common
parent are to the corporation that was the
common parent immediately before the
acquisition.
(2) Anti-avoidance rule. If a corporation that becomes a common parent of a
group acquires assets with a net unrealized built-in loss in excess of the threshold requirement of section 382(h)(3)(B)
(and thereby increases its net unrealized
built-in loss or decreases its net unrealized built-in gain) prior to, and in anticipation of, the formation of the group,
paragraph (f)(1) of this section does not
apply.
(g) Overlap with section 382—(1)
General rule. The limitations provided in
§§1.1502-21(c) and 1.1502–22(c) do not
apply to recognized built-in losses or to
loss carryovers or carrybacks attributable
to recognized built-in losses when the application of paragraph (a) of this section
results in an overlap with the application
of section 382.
(2) Definitions—(i) Generally. For purposes of this paragraph (g), the definitions
and nomenclature contained in section
382, the regulations thereunder, and
§§1.1502–90 through 1.1502–99 apply.

July 19, 1999

(ii) Overlap—(A) An overlap of the
application of paragraph (a) of this section and the application of section 382
with respect to built-in losses occurs if a
corporation becomes a member of a consolidated group (the SRLY event) within
six months of the change date of an ownership change giving rise to a section
382(a) limitation that would apply with
respect to the corporation’s recognized
built-in losses (the section 382 event).
Except as provided in paragraph (g)(3) of
this section, application of the overlap
rule does not require that the size and
composition of the corporation’s net unrealized built-in loss is the same on the date
of the section 382 event and the SRLY
event.
(B) For special rules in the event that
there is a SRLY subgroup and/or a loss
subgroup as defined in §1.1502–91(d)(2)
with respect to built-in losses, see paragraph (g)(4) of this section.
(3) Operating rules—(i) Section 382
event before SRLY event. If a SRLY event
occurs on the same date as a section 382
event or within the six month period beginning on the date of the section 382
event, paragraph (g)(1) of this section applies beginning with the tax year that includes the SRLY event. Paragraph (g)(1)
of this section does not apply, however, if
a corporation that would otherwise be
subject to the overlap rule acquires assets
from a person other than a member of the
group with a net unrealized built-in loss in
excess of the threshold requirement of
section 382(h)(3)(B) (and thereby increases its net unrealized built-in loss)
after the section 382 event, and before the
SRLY event.
(ii) SRLY event before section 382
event. If a section 382 event occurs
within the period beginning the day after
the SRLY event and ending six months
after the SRLY event, paragraph (g)(1) of
this section applies starting with the first
tax year that begins after the section 382
event. However, paragraph (g)(1) of this
section does not apply at any time if a corporation that otherwise would be subject
to paragraph (g)(1) of this section transfers assets with an unrealized built-in loss
to another member of the group after the
SRLY event, but before the section 382
event, unless the corporation recognizes
the built-in loss upon the transfer.

50

(4) Subgroup rules. In general, in the
case of built-in losses for which there is a
SRLY subgroup and the corporations
joining the group at the time of the SRLY
event also constitute a loss subgroup (as
defined in §1.1502–91(d)(2)), the principles of this paragraph (g) apply to the
SRLY subgroup, and not separately to its
members. However, paragraph (g)(1) of
this section applies with respect to built-in
losses only if—
(i) all members of the SRLY subgroup
with respect to those built-in losses are
also included in a loss subgroup; and
(ii) all members of a loss subgroup are
also members of a SRLY subgroup with
respect to those built-in losses.
(5) Asset acquisitions. Notwithstanding the application of this paragraph (g),
paragraph (a) of this section applies to
asset acquisitions by the corporation that
occurs after the latter of the SRLY event
and the section 382 event. See, paragraph
(b)(2)(ii) of this section.
(6) Examples. The principles of this
paragraph (g) are illustrated by the following examples:
Example 1. Determination of subgroup. (i) Individual A owns all of the stock of P, P1, and S. In
Year 1, P acquires all of the stock of P1, and they file
a consolidated return. In Year 3, P acquires all of the
stock of S, and S joins the P group. Individual B,
unrelated to Individual A, owns all of the stock of M
and K, each the common parent of a consolidated
group. Individual C, unrelated to either Individual A
or Individual B, owns all of the stock of T.
(ii) At the beginning of Year 7, M acquires all of
the stock of P from Individual A, and, as a result, P,
P1, and S become members of the M group. At the
time of M’s acquisition of the P stock, P has a $15
net unrealized built-in loss (disregarding the stock of
P1), P1 has a net unrealized built-in gain of $10, and
S has a net unrealized built-in gain of $5.
(iii) During Year 8, M acquires all of the stock of
T, and T joins the M group. At the time of M’s acquisition of the T stock, T had an unrealized built-in
loss of $15. At the beginning of Year 9, K acquires
all of the stock of M from Individual B, and the
members of the M consolidated group including P,
P1, S, and T become members of the K group. At
the time of K’s acquisition of the M stock, M has
(disregarding the stock of P and T) a $15 net unrealized built-in loss, P has a $20 net unrealized built-in
loss (disregarding the stock of P1), P1 has a net unrealized built-in gain of $5, S has a net unrealized
built-in loss of $35, and T has a $15 net unrealized
built-in loss.
(iv) M’s acquisition of P in Year 7 results in P, P1,
and S becoming members of the M group (the SRLY
event). Under paragraph (c) of this section, P and P1
compose a SRLY built-in loss subgroup because
they have been affiliated for the 60 consecutive

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month period immediately preceding joining the M
group. S is not a member of the subgroup because
on becoming a member of the M group it had not
been continuously affiliated with P and P1 for the 60
month period ending immediately before it became
a member of the M group. Consequently, §1.1502–
15 applies to S separately from the P and P1 subgroup.
(v) Assuming that the $5 net unrealized built-in
loss of the P/P1 subgroup exceeds the threshold requirement under section 382(h)(3)(B), M’s acquisition of P resulted in an ownership change of P and P1
within the meaning of section 382(g) that subjects P
and P1 to a limitation under section 382(a) (the section 382 event). Because, with respect to P and P1,
the SRLY event and the change date of the section
382 event occur on the same date and because the
loss subgroup and SRLY subgroup are coextensive,
there is an overlap of the application of the SRLY
rules and the application of the section 382.
(vi) S was not a loss corporation because it did
not have a net operating loss carryover, or a net unrealized built-in loss, and therefore, M’s acquisition
of P did not result in an ownership change of S
within the meaning of section 382(g). S, therefore is
not subject to the overlap rule of paragraph (g) of
this section.
(vii) M’s acquisition of T resulted in T becoming
a member of the M group (the SRLY event). Assuming that T’s $15 net unrealized built-in loss exceeds the threshold requirement under section
382(h)(3)(B), M’s acquisition of T also resulted in
an ownership change of T within the meaning of
section 382(g) that subjects T to a limitation under
section 382(a) (the section 382 event). Because,
with respect to T, the SRLY event and the change
date of the section 382 event occur on the same date,
there is an overlap of the application of the SRLY
rules and the application of section 382 within the
meaning of paragraph (g) of this section.
(viii) K’s acquisition of M results in the members
of the M consolidated group, including T, P, P1, and
S, becoming members of the K group (the SRLY
event). Because T, P, and P1 were each included in
the determination of a net unrealized built-in loss
that was subject to the overlap rule described in
paragraph (g)(1) of this section when they each became members of the M group, they are deemed
under paragraph (c)(3) of this section to have been
continuously affiliated with M for the 60 month period ending immediately before becoming a member
of the M group, notwithstanding their actual affiliation history. As a result, M, T, P, and P1 compose a
SRLY built-in loss subgroup under paragraph (c)(2)
of this section. K’s acquisition of M is not subject to
paragraph (g) of this section because it does not result in a section 382 event.
(ix) S, however, is not a member of the subgroup under paragraph (c)(2) of this section. Because S was not included in the determination of a
net unrealized built-in loss that was subject to the
overlap rule described in paragraph (g)(1) of this
section when it joined the M group, S is treated as
becoming an affiliate of M on the date it joined the
M group. Furthermore, under paragraph (c)(3) of
this section, S is deemed to have begun its affiliation with P and P1 on the date it joined the M group.
Consequently, §1.1502–15 applies to S separately
to the extent its built-in loss is recognized with the
recognition period.

1999–29 I.R.B.

Example 2. Post-overlap acquisition of assets. (i)
Individual A owns all of the stock of P, the common
parent of a consolidated group. B, an individual unrelated to Individual A, owns all of the stock of T. T
has two depreciable assets. Asset 1 has an unrealized
built-in loss of $25 (basis $75, value $50), and asset
2 has an unrealized built-in gain of $20 (basis $30,
value $50). During Year 3, P buys all of the stock of
T from Individual B. On January 1, Year 4, P contributes $80 cash and Individual A contributes asset
3, a depreciable asset, with a net unrealized built-in
loss of $45 (basis $65, value $20), in exchange for T
stock in a transaction that is described in section
351.
(ii) P’s acquisition of T results in T becoming a
member of the P group (the SRLY event) and also
results in an ownership change of T, within the
meaning of section 382(g), that gives rise to a limitation under section 382(a) (the section 382 event).
(iii) Because the SRLY event and the change date
of the section 382 event occur on the same date,
there is an overlap of the application of the SRLY
rules and the application of section 382. Consequently, under paragraph (g) of this section, the limitation under paragraph (a) of this section does not
apply to T’s net unrealized built-in loss when it
joined the P group.
(iv) Individual A’s Year 4 contribution of a depreciable asset occurred after T was a member of the P
group. Assuming that the amount of the net unrealized built-in loss exceeds the threshold requirement
of section 382(h)(3)(B), the sale of asset 3 within the
recognition period is subject to the SRLY limitation
of paragraphs (a) and (b)(2)(ii) of this section.
Example 3. Overlap rule. (i) Individual A owns
all of the stock of P, the common parent of a consolidated group. B, an individual unrelated to Individual A, owns all of the stock of T. T has two depreciable assets. Asset 1 has an unrealized loss of $55
(basis $75, value $20), and asset 2 has an unrealized
gain of $30 (basis $30, value $60). On February 28
of Year 2, P purchases 55% of T from Individual B.
On June 30, of Year 2, P purchases an additional
35% of T from Individual B.
(ii) The February 28 purchase of 55% of T is a
section 382 event because it results in an ownership
change of T that gives rise to a section 382(a) limitation. The June 30 purchase of 35% of T results in T
becoming a member of the P group and is therefore a
SRLY event.
(iii) Because the SRLY event occurred within six
months of the change date of the section 382 event,
there is an overlap of the application of the SRLY
rules and the application of section 382, and paragraph (a) of this section does not apply. Therefore,
the SRLY limitation does not apply to any of the $55
loss in asset 1 recognized by T after T joined the P
group. See §1.1502–94 for rules relating to the application of section 382 with respect to T’s $25 unrealized built-in loss.
Example 4. Overlap rule-Fluctuation in value. (i)
The facts are the same as in Example 3, except that
by June 30, of Year 2, asset 1 had declined in value
by a further $10. Thus asset 1 had an unrealized loss
of $65 (basis $75, value $10), and asset 2 had an unrealized gain of $30 (basis $30, value $60).
(ii) Because paragraph (a) of this section does not
apply, the further decrease in asset 1’s value is disregarded. Consequently, the results are the same as in
Example 3.

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(h) Effective date—(1) In general. This
section generally applies to built-in losses
recognized in taxable years for which the
due date (without extensions) of the consolidated return is after June 25, 1999.
However—
(i) In the event that paragraphs (f)(1)
and (g)(1) of this section do not apply to a
particular built-in loss in the current
group, then solely for purposes of applying paragraph (a) of this section to determine a limitation with respect to that
built-in loss and with respect to which the
SRLY register (consolidated taxable income determined by reference to only the
member’s (or subgroup’s) items of income, gain, deduction or loss) began in a
taxable year for which the due date of the
return was on or before June 25, 1999),
paragraph (c)(3) of this section shall not
apply; and
(ii) For purposes of paragraph (g) of
this section, only an ownership change to
which section 382(a) as amended by the
Tax Reform Act of 1986 applies shall
constitute a section 382 event.
(2) Prior periods. For certain taxable
years ending on or before June 25, 1999,
see §1.1502–15T in effect prior to June
25, 1999, as contained in 26 CFR part 1
revised April 1, 1999, as applicable.
§1.1502–15T [Removed]
Par. 5. Section 1.1502–15T is removed.
Par. 6. Section 1.1502–21 is added to
read as follows:
§1.1502–21 Net operating losses.
(a) Consolidated net operating loss deduction. The consolidated net operating
loss deduction (or CNOL deduction) for
any consolidated return year is the aggregate of the net operating loss carryovers
and carrybacks to the year. The net operating loss carryovers and carrybacks consist of—
(1) Any CNOLs (as defined in paragraph (e) of this section) of the consolidated group; and
(2) Any net operating losses of the
members arising in separate return years.
(b) Net operating loss carryovers and
carrybacks to consolidated return and
separate return years. Net operating
losses of members arising during a consolidated return year are taken into account in determining the group’s CNOL

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under paragraph (e) of this section for that
year. Losses taken into account in determining the CNOL may be carried to other
taxable years (whether consolidated or
separate) only under this paragraph (b).
(1) Carryovers and carrybacks generally. The net operating loss carryovers
and carrybacks to a taxable year are determined under the principles of section 172
and this section. Thus, losses permitted to
be absorbed in a consolidated return year
generally are absorbed in the order of the
taxable years in which they arose, and
losses carried from taxable years ending
on the same date, and which are available
to offset consolidated taxable income for
the year, generally are absorbed on a pro
rata basis. Additional rules provided
under the Internal Revenue Code or regulations also apply. See, e.g., section
382(l)(2)(B) (if losses are carried from the
same taxable year, losses subject to limitation under section 382 are absorbed before losses that are not subject to limitation under section 382). See Example 2 of
paragraph (c)(1)(iii) of this section for an
illustration of pro rata absorption of losses
subject to a SRLY limitation.
(2) Carryovers and carrybacks of
CNOLs to separate return years—(i) In
general. If any CNOL that is attributable
to a member may be carried to a separate
return year of the member, the amount of
the CNOL that is attributable to the member is apportioned to the member (apportioned loss) and carried to the separate return year. If carried back to a separate
return year, the apportioned loss may not
be carried back to an equivalent, or earlier, consolidated return year of the group;
if carried over to a separate return year,
the apportioned loss may not be carried
over to an equivalent, or later, consolidated return year of the group. For rules
permitting the reattribution of losses of a
subsidiary to the common parent when
loss is disallowed on the disposition of
subsidiary stock, see §1.1502–20(g).
(ii) Special rules—(A) Year of departure from group. If a corporation ceases to
be a member during a consolidated return
year, net operating loss carryovers attributable to the corporation are first carried
to the consolidated return year, and only
the amount so attributable that is not absorbed by the group in that year is carried
to the corporation’s first separate return
year. For rules concerning a member de-

July 19, 1999

parting a subgroup, see paragraph (c)(2)(vii) of this section.
(B) Offspring rule. In the case of a
member that has been a member continuously since its organization (determined
without regard to whether the member is a
successor to any other corporation), the
CNOL attributable to the member is included in the carrybacks to consolidated
return years before the member’s existence. If the group did not file a consolidated return for a carryback year, the loss
may be carried back to a separate return
year of the common parent under paragraph (b)(2)(i) of this section, but only if
the common parent was not a member of
a different consolidated group or of an affiliated group filing separate returns for
the year to which the loss is carried or any
subsequent year in the carryback period.
Following an acquisition described in
§1.1502–75(d)(2) or (3), references to the
common parent are to the corporation that
was the common parent immediately before the acquisition.
(iii) Equivalent years. Taxable years are
equivalent if they bear the same numerical
relationship to the consolidated return year
in which a CNOL arises, counting forward
or backward from the year of the loss. For
example, in the case of a member’s third
taxable year (which was a separate return
year) that preceded the consolidated return
year in which the loss arose, the equivalent year is the third consolidated return
year preceding the consolidated return
year in which the loss arose. See paragraph (b)(3)(iii) of this section for certain
short taxable years that are disregarded in
making this determination.
(iv) Amount of CNOL attributable to a
member. The amount of a CNOL that is
attributable to a member is determined by
a fraction the numerator of which is the
separate net operating loss of the member
for the year of the loss and the denominator of which is the sum of the separate net
operating losses for that year of all members having such losses. For this purpose,
the separate net operating loss of a member is determined by computing the
CNOL by reference to only the member’s
items of income, gain, deduction, and
loss, including the member’s losses and
deductions actually absorbed by the group
in the taxable year (whether or not absorbed by the member).

52

(v) Examples. For purposes of the examples in this section, unless otherwise
stated, all groups file consolidated returns, all corporations have calendar taxable years, the facts set forth the only corporate activity, value means fair market
value and the adjusted basis of each asset
equals its value, all transactions are with
unrelated persons, and the application of
any limitation or threshold under section
382 is disregarded. The principles of this
paragraph (b)(2) are illustrated by the following examples:
Example 1. Offspring rule. (i) During Year 1, Individual A forms P and T, and they each file a separate return. P forms S on March 15 of Year 2, and P
and S file a consolidated return. P acquires all the
stock of T from Individual A at the beginning of
Year 3, and T becomes a member of the P group. P’s
acquisition of T is not an ownership change within
the meaning of section 382. P, S, and T sustain a
$1,100 CNOL in Year 3 and, under paragraph
(b)(2)(iv) of this section, the loss is attributable $200
to P, $300 to S, and $600 to T.
(ii) Of the $1,100 CNOL in Year 3, the $500
amount of the CNOL that is attributable to P and S
($200 + $300) may be carried to P’s separate return
in Year 1. Even though S was not in existence in
Year 1, the $300 amount of the CNOL attributable to
S may be carried back to P’s separate return in Year
1 because S (unlike T) has been a member of the P
group since its organization and P is a qualified parent under paragraph (b)(2)(ii)(B) of this section. To
the extent not absorbed in that year, the loss may
then be carried to the P group’s return in Year 2. The
$600 amount of the CNOL attributable to T is a net
operating loss carryback to T’s separate return in
Year 1, and if not absorbed in Year 1, then to Year 2.
Example 2. Departing members. (i) The facts are
the same as in Example 1. In addition, on June 15 of
Year 4, P sells all the stock of T. The P group’s consolidated return for Year 4 includes the income of T
through June 15. T files a separate return for the period from June 16 through December 31.
(ii) $600 of the Year 3 CNOL attributable to T is
apportioned to T and is carried back to its separate
return in Year 1. To the extent the $600 is not absorbed in T’s separate return in Year 1 or Year 2, it is
carried to the consolidated return in Year 4 before
being carried to T’s separate return in Year 4. Any
portion of the loss not absorbed in T’s Year 1 or Year
2 or in the P group’s Year 4 is then carried to T’s separate return in Year 4.
Example 3. Offspring rule following acquisition.
(i) Individual A owns all of the stock of P, the common parent of a consolidated group. In Year 1, B, an
individual unrelated to Individual A, forms T. P acquires all of the stock of T at the beginning of Year
3, and T becomes a member of the P group. The P
group has $200 of consolidated taxable income in
Year 2, and $300 of consolidated taxable income in
Year 3 (computed without regard to the CNOL deduction). At the beginning of Year 4, T forms a subsidiary, Y, in a transaction described in section 351.
The P group has a $300 consolidated net operating

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loss in Year 4, and under paragraph (b)(2)(iv) of this
section, the loss is attributable entirely to Y.
(ii) Even though Y was not in existence in Year 2,
$300, the amount of the consolidated net operating
loss attributable to Y, may be carried back to the P
group’s Year 2 consolidated return under paragraph
(b)(2)(ii)(B) of this section because Y has been a
member of the P group since its organization. To the
extent not absorbed in that year, the loss may then be
carried to the P group’s consolidated return in Year 3

(3) Special rules—(i) Election to relinquish carryback. A group may make an irrevocable election under section
172(b)(3) to relinquish the entire carryback period with respect to a CNOL for
any consolidated return year. Except as
provided in paragraph (b)(3)(ii)(B) of this
section, the election may not be made
separately for any member (whether or
not it remains a member), and must be
made in a separate statement entitled
“THIS IS AN ELECTION UNDER SECTION 1.1502–21(b)(3)(i) TO WAIVE
THE ENTIRE CARRYBACK PERIOD
PURSUANT TO SECTION 172(b)(3)
FOR THE [insert consolidated return
year] CNOLs OF THE CONSOLIDATED GROUP OF WHICH [insert
name and employer identification number
of common parent] IS THE COMMON
PARENT.” The statement must be signed
by the common parent and filed with the
group’s income tax return for the consolidated return year in which the loss arises.
(ii) Special elections—(A) Groups that
include insolvent financial institutions. For
rules applicable to relinquishing the entire
carryback period with respect to losses attributable to insolvent financial institutions, see §301.6402–7 of this chapter.
(B) Acquisition of member from another consolidated group. If one or more
members of a consolidated group becomes a member of another consolidated
group, the acquiring group may make an
irrevocable election to relinquish, with respect to all consolidated net operating
losses attributable to the member, the portion of the carryback period for which the
corporation was a member of another
group, provided that any other corporation joining the acquiring group that was
affiliated with the member immediately
before it joined the acquiring group is also
included in the waiver. This election is
not a yearly election and applies to all
losses that would otherwise be subject to
a carryback to a former group under section 172. The election must be made in a

1999–29 I.R.B.

separate statement entitled “THIS IS AN
ELECTION UNDER SECTION 1.1502–
21(b)(3)(ii)(B) TO WAIVE THE PRE[insert first taxable year for which the
member (or members) was not a member
of another group] CARRYBACK PERIOD FOR THE CNOLs attributable to
[insert names and employer identification
number of members].” The statement
must be filed with the acquiring consolidated group’s original income tax return
for the year the corporation (or corporations) became a member, and it must be
signed by the common parent and each of
the members to which it applies.
(iii) Short years in connection with
transactions to which section 381(a) applies. If a member distributes or transfers
assets to a corporation that is a member
immediately after the distribution or
transfer in a transaction to which section
381(a) applies, the transaction does not
cause the distributor or transferor to have
a short year within the consolidated return
year of the group in which the transaction
occurred that is counted as a separate year
for purposes of determining the years to
which a net operating loss may be carried.
(iv) Special status losses. [Reserved]
(c) Limitations on net operating loss
carryovers and carrybacks from separate
return limitation years—(1) SRLY limitation—(i) General rule. Except as provided in paragraph (g) of this section (relating to an overlap with section 382), the
aggregate of the net operating loss carryovers and carrybacks of a member arising
(or treated as arising) in SRLYs that are
included in the CNOL deductions for all
consolidated return years of the group
under paragraph (a) of this section may
not exceed the aggregate consolidated
taxable income for all consolidated return
years of the group determined by reference to only the member’s items of income, gain, deduction, and loss. For this
purpose—
(A) Consolidated taxable income is
computed without regard to CNOL deductions;
(B) Consolidated taxable income takes
into account the member’s losses and deductions (including capital losses) actually absorbed by the group in consolidated return years (whether or not
absorbed by the member);
(C) In computing consolidated taxable
income, the consolidated return years of

53

the group include only those years, including the year to which the loss is carried, that the member has been continuously included in the group’s consolidated
return, but exclude—
(1) For carryovers, any years ending
after the year to which the loss is carried;
and
(2) For carrybacks, any years ending
after the year in which the loss arose; and
(D) The treatment under §1.1502–15 of
a built-in loss as a hypothetical net operating loss carryover in the year recognized
is solely for purposes of determining the
limitation under this paragraph (c) with
respect to the loss in that year and not for
any other purpose. Thus, for purposes of
determining consolidated taxable income
for any other losses, a built-in loss allowed under this section in the year it
arises is taken into account.
(ii) Losses treated as arising in SRLYs.
If a net operating loss carryover or carryback did not arise in a SRLY but is attributable to a built-in loss (as defined under
§1.1502–15), the carryover or carryback
is treated for purposes of this paragraph
(c) as arising in a SRLY if the built-in loss
was not allowed, after application of the
SRLY limitation, in the year it arose. For
an illustration, see §1.1502–15(d), Example 5. But see §1.1502–15(g)(1).
(iii) Examples. The principles of this
paragraph (c)(1) are illustrated by the following examples:
Example 1. Determination of SRLY limitation. (i)
Individual A owns P. In Year 1, Individual A forms
T, and T sustains a $100 net operating loss that is
carried forward. P acquires all the stock of T at the
beginning of Year 2, and T becomes a member of the
P group. The P group has $300 of consolidated taxable income in Year 2 (computed without regard to
the CNOL deduction). Such consolidated taxable income would be $70 if determined by reference to
only T’s items.
(ii) T’s $100 net operating loss carryover from
Year 1 arose in a SRLY. See §1.1502–1(f)(2)(iii). P’s
acquisition of T was not an ownership change as defined by section 382(g). Thus, the $100 net operating loss carryover is subject to the SRLY limitation
in paragraph (c)(1) of this section. The SRLY limitation for Year 2 is consolidated taxable income determined by reference to only T’s items, or $70. Thus,
$70 of the loss is included under paragraph (a) of
this section in the P group’s CNOL deduction for
Year 2.
(iii) The facts are the same as in paragraph (i) of
this Example 1, except that such consolidated taxable income (computed without regard to the CNOL
deduction and by reference to only T’s items) for
Year 2 is a loss (a CNOL) of $370. Because the
SRLY limitation may not exceed the consolidated

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taxable income determined by reference to only T’s
items, and such items aggregate to a CNOL, T’s $
100 net operating loss carryover from Year 1 is not
allowed under the SRLY limitation in Year 2. Moreover, if consolidated taxable income (computed
without regard to the CNOL deduction and by reference to only T’s items) did not exceed $370 in Year
3, the carryover would still be restricted under paragraph (c) of this section in Year 3, because the aggregate consolidated taxable income for all consolidated return years of the group computed by
reference to only T’s items would not be a positive
amount.
Example 2. Net operating loss carryovers. (i) In
Year 1, Individual A forms P, and P sustains a $40
net operating loss that is carried forward. P has no
income in Year 2. Individual A also owns T which
sustains a net operating loss of $50 in Year 2 that is
carried forward. P acquires the stock of T from Individual A during Year 3, but T is not a member of the
P group for each day of the year. P and T file separate returns and sustain net operating losses of $120
and $60, respectively, for Year 3. The P group files
consolidated returns beginning in Year 4. During
Year 4, the P group has $160 of consolidated taxable
income (computed without regard to the CNOL deduction). Such consolidated taxable income would
be $70 if determined by reference to only T’s items.
These results are summarized as follows:
Separate/
Separate Separate Affiliated Consolidated
Year 1
Year 2
Year 3
Year 4
P
T
CTI

$(40)
0

$0
(50)

$(120)
(60)

$90
70
160

(ii) P’s Year 1, Year 2, and Year 3 are not SRLYs
with respect to the P group. See §1.1502–1(f)(2)(i).
Thus, P’s $ 40 net operating loss arising in Year 1
and $120 net operating loss arising in Year 3 are not
subject to the SRLY limitation under paragraph (c)
of this section. Under the principles of section 172,
paragraph (b) of this section requires that the loss
arising in Year 1 be the first loss absorbed by the P
group in Year 4. Absorption of this loss leaves $120
of the group’s consolidated taxable income available
for offset by other loss carryovers.
(iii) T’s Year 2 and Year 3 are SRLYs with respect
to the P group. See §1.1502–1(f)(2)(ii). P’s acquisition of T was not an ownership change as defined by
section 382(g). Thus, T’s $50 net operating loss arising in Year 2 and $60 net operating loss arising in
Year 3 are subject to the SRLY limitation. Under
paragraph (c)(1) of this section, the SRLY limitation
for Year 4 is $70, and under paragraph (b) of this
section, T’s $50 loss from Year 2 must be included
under paragraph (a) of this section in the P group’s
CNOL deduction for Year 4. The absorption of this
loss leaves $70 of the group’s consolidated taxable
income available for offset by other loss carryovers.
(iv) P and T each carry over net operating losses
to Year 4 from a taxable year ending on the same
date (Year 3). The losses carried over from Year 3
total $180. Under paragraph (b) of this section, the
losses carried over from Year 3 are absorbed on a
pro rata basis, even though one arises in a SRLY and
the other does not. However, the group cannot absorb more than $20 of T’s $60 net operating loss
arising in Year 3 because its $70 SRLY limitation for

July 19, 1999

Year 4 is reduced by T’s $50 Year 2 SRLY loss already included in the CNOL deduction for Year 4.
Thus, the absorption of Year 3 losses is as follows:
Amount of P’s Year 3 losses absorbed = $120/
($120 + $20) ⫻ $70 = $60.
Amount of T’s Year 3 losses absorbed = $20/
($120 + $20) ⫻ $70 = $10.
(v) The absorption of $10 of T’s Year 3 loss further reduces T’s SRLY limitation to $10 ($70 of initial SRLY limitation, reduced by the $60 net operating loss already included in the CNOL deductions
for Year 4 under paragraph (a) of this section).
(vi) P carries its remaining $60 Year 3 net operating loss and T carries its remaining $50 Year 3 net
operating loss over to Year 5. Assume that, in Year 5,
the P group has $90 of consolidated taxable income
(computed without regard to the CNOL deduction).
The group’s CTI determined by reference to only T’s
items is a CNOL of $4. For Year 5, the CNOL deduction is $66, which includes $60 of P’s Year 3 loss
and $6 of T’s Year 3 loss (the aggregate consolidated
taxable income for Years 4 and 5 determined by reference to T’s items, or $66, reduced by T’s SRLY
losses actually absorbed by the group in Year 4, or
$60).
Example 3. Net operating loss carrybacks. (i) P
owns all of the stock of S and T. The members of the
P group contribute the following to the consolidated
taxable income of the P group for Years 1, 2, and 3:
Year 1
P
S
T
CTI

$100
20
30
150

Year 2

Year 3

Total

$60
20
10
90

$80
30
(50)
60

$240
70
(10)
300

(ii) P sells all of the stock of T to Individual A at
the beginning of Year 4. For its Year 4 separate return year, T has a net operating loss of $30.
(iii) T’s Year 4 is a SRLY with respect to the P
group. See §1.1502–1(f)(1). T’s $30 net operating
loss carryback to the P group from Year 4 is not allowed under paragraph (c) of this section to be included in the CNOL deduction under paragraph (a)
of this section for Year 1, 2, or 3, because the P
group’s consolidated taxable income would not be a
positive amount if determined by reference to only
T’s items for all consolidated return years through
Year 4 (without regard to the $30 net operating loss).
The $30 loss is carried forward to T’s Year 5 and
succeeding taxable years as provided under the Internal Revenue Code.
Example 4. Computation of SRLY limitation for
built-in losses treated as net operating loss carryovers. (i) Individual A owns P. In Year 1, Individual
A forms T by contributing $300 and T sustains a
$100 net operating loss. During Year 2, T’s assets
decline in value by $100. At the beginning of Year 3,
P acquires all the stock of T from Individual A, and
T becomes a member of the P group in a transaction
that does not result in an ownership change under
section 382(g). At the time of the acquisition, T has a
$100 net unrealized built-in loss, which exceeds the
threshold requirements of section 382(h)(3)(B).
During Year 3, T recognizes its unrealized loss as a
$100 ordinary loss. The members of the P group
contribute the following to the consolidated taxable
income of the P group for Years 3 and 4 (computed
without regard to T’s recognition of its unrealized
loss and any CNOL deduction under this section):

54

P group
(without T)
T
CTI

Year 3
$100

Year 4
$100

Total
$200

60
160

40
140

100
300

(ii) Under §1.1502–15(a), T’s $100 of ordinary
loss in Year 3 constitutes a built-in loss that is subject to the SRLY limitation under paragraph (c) of
this section. The amount of the limitation is determined by treating the deduction as a net operating
loss carryover from a SRLY. The built-in loss is
therefore subject to a $60 SRLY limitation for Year
3. The built-in loss is treated as a net operating loss
carryover solely for purposes of determining the extent to which the loss is not allowed by reason of the
SRLY limitation, and for all other purposes the loss
remains a loss arising in Year 3. Consequently, under
paragraph (b) of this section, the $60 allowed under
the SRLY limitation is absorbed by the P group before T’s $100 net operating loss carryover from Year
1 is allowed.
(iii) Under §1.1502–15(a), the $40 balance of the
built-in loss that is not allowed in Year 3 because of
the SRLY limitation is treated as a $40 net operating
loss arising in Year 3 that is subject to the SRLY limitation because, under paragraph (c)(1)(ii) of this
section, Year 3 is treated as a SRLY, and is carried to
other years in accordance with the rules of paragraph (b) of this section. The SRLY limitation for
Year 4 is the P group’s consolidated taxable income
for Year 3 and Year 4 determined by reference to
only T’s items and without regard to the group’s
CNOL deductions ($60 + $40), reduced by T’s loss
actually absorbed by the group in Year 3 ($60). The
SRLY limitation for Year 4 is $40.
(iv) Under paragraph (c) of this section and the
principles of section 172(b), $40 of T’s $100 net operating loss carryover from Year 1 is included in the
CNOL deduction under paragraph (a) of this section
in Year 4.
Example 5. Dual SRLY registers and accounting
for SRLY losses actually absorbed. (i) In Year 1, T
sustains a $ 100 net operating loss and a $50 net capital loss. At the beginning of Year 2, T becomes a
member of the P group in a transaction that does not
result in an ownership change under section 382(g).
Both of T’s carryovers from Year 1 are subject to
SRLY limits under this paragraph (c) and §1.1502–
22(c). The members of the P group contribute the
following to the consolidated taxable income for
Years 2 and 3 (computed without regard to T’s
CNOL deduction under this section or net capital
loss carryover under §1.1502–22):
P
Year 1 (SRLY)
Ordinary
Capital
Year 2
Ordinary
Capital
Year 3
Ordinary
Capital

T
(100)
(50)

30
0

60
(20)

10
0

40
30

(ii) For Year 2, the group computes separate
SRLY limits for each of T’s SRLY carryovers from
Year 1. The group determines its ability to use its
capital loss carryover before it determines its ability

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to use its ordinary loss carryover. Under section
1212, because the group has no Year 2 capital gain,
it cannot absorb any capital losses in Year 2. T’s
Year 1 net capital loss and the group’s Year 2 consolidated net capital loss (all of which is attributable to
T) are carried over to Year 3.
(iii) Under this section, the aggregate amount of
T’s $100 net operating loss carryover from Year 1
that may be included in the CNOL deduction of the
group for Year 2 may not exceed $60 — the amount
of the consolidated taxable income computed by reference only to T’s items, including losses and deductions to the extent actually absorbed (i.e., $60 of T’s
ordinary income for Year 2). Thus, the group may
include $60 of T’s ordinary loss carryover from Year
1 in its Year 2 CNOL deduction. T carries over its remaining $40 of its Year 1 loss to Year 3.
(iv) For Year 3, the group again computes separate SRLY limits for each of T’s SRLY carryovers
from Year 1. The group has consolidated net capital
gain (without taking into account a net capital loss
carryover deduction) of $30. Under §1.1502–22(c),
the aggregate amount of T’s $50 capital loss carryover from Year 1 that may be included in computing
the group’s consolidated net capital gain for all years
of the group (here Years 2 and 3) may not exceed
$30 (the aggregate consolidated net capital gain
computed by reference only to T’s items, including
losses and deductions actually absorbed (i.e., $30 of
capital gain in Year 3)). Thus, the group may include
$30 of T’s Year 1 capital loss carryover in its computation of consolidated net capital gain for Year 3,
which offsets the group’s capital gains for Year 3. T
carries over its remaining $20 of its Year 1 loss to
Year 4. The group carries over the Year 2 consolidated net capital loss to Year 4.
(v) Under this section, the aggregate amount of
T’s net operating loss carryover from Year 1 that
may be included in the CNOL deduction of the
group for Years 2 and 3 may not exceed $100, which
is the amount of the aggregate consolidated taxable
income for Years 2 and 3 determined by reference
only to T’s items, including losses and deductions
actually absorbed (i.e., $60 of ordinary income in
Year 2 plus $40 of ordinary income, $30 of capital
gain, and $30 of SRLY capital losses actually absorbed in Year 3). The group included $60 of T’s ordinary loss carryover in its Year 2 CNOL deduction.
It may include the remaining $40 of the carryover in
its Year 3 CNOL deduction.

(2) SRLY subgroup limitation. In the
case of a net operating loss carryover or
carryback for which there is a SRLY subgroup, the principles of paragraph (c)(1)
of this section apply to the SRLY subgroup, and not separately to its members.
Thus, the contribution to consolidated
taxable income and the net operating loss
carryovers and carrybacks arising (or
treated as arising) in SRLYs that are included in the CNOL deductions for all
consolidated return years of the group
under paragraph (a) of this section are
based on the aggregate amounts of income, gain, deduction, and loss of the
members of the SRLY subgroup for the

1999–29 I.R.B.

relevant consolidated return years (as provided in paragraph (c)(1)(i)(C) of this section). For an illustration of aggregate
amounts during the relevant consolidated
return years following the year in which a
member of a SRLY subgroup ceases to be
a member of the group, see paragraph
(c)(2)(viii) Example 4 of this section. A
SRLY subgroup may exist only for a carryover or carryback arising in a year that
is not a SRLY (and is not treated as a
SRLY under paragraph (c)(1)(ii) of this
section) with respect to another group (the
former group), or for a carryover that was
subject to the overlap rule described in
paragraph (g) of this section or §1.1502–
15(g) with respect to another group (the
former group). A separate SRLY subgroup
is determined for each such carryover or
carryback. A consolidated group may include more than one SRLY subgroup and
a member may be a member of more than
one SRLY subgroup. Solely for purposes
of determining the members of a SRLY
subgroup with respect to a loss:
(i) Carryovers. In the case of a carryover, the SRLY subgroup is composed of
the member carrying over the loss (the
loss member) and each other member that
was a member of the former group that
becomes a member of the group at the
same time as the loss member. A member
remains a member of the SRLY subgroup
until it ceases to be affiliated with the loss
member. The aggregate determination described in paragraph (c)(1) of this section
and this paragraph (c)(2) includes the
amounts of income, gain, deduction, and
loss of each member of the SRLY subgroup for the consolidated return years
during which it remains a member of the
SRLY subgroup. For an illustration of the
aggregate determination of a SRLY subgroup, see paragraph (c)(2)(viii) Example
2 of this section.
(ii) Carrybacks. In the case of a carryback, the SRLY subgroup is composed of
the member carrying back the loss (the
loss member) and each other member of
the group from which the loss is carried
back that has been continuously affiliated
with the loss member from the year to
which the loss is carried through the year
in which the loss arises.
(iii) Built-in losses. In the case of a
built-in loss, the SRLY subgroup is composed of the member recognizing the loss
(the loss member) and each other member

55

that was part of the subgroup with respect
to the loss determined under §1.1502–
15(c)(2) immediately before the members
became members of the group. The principles of paragraphs (c)(2)(i) and (ii) of
this section apply to determine the SRLY
subgroup for the built-in loss that is,
under paragraph (c)(1)(ii) of this section,
treated as arising in a SRLY with respect
to the group in which the loss is recognized. For this purpose and as the context
requires, a reference in paragraphs
(c)(2)(i) and (ii) of this section to a group
or former group is a reference to the subgroup determined under §1.1502–
15(c)(2).
(iv) Principal purpose of avoiding or
increasing a SRLY limitation. The members composing a SRLY subgroup are not
treated as a SRLY subgroup if any of
them is formed, acquired, or availed of
with a principal purpose of avoiding the
application of, or increasing any limitation under, this paragraph (c). Any member excluded from a SRLY subgroup, if
excluded with a principal purpose of so
avoiding or increasing any SRLY limitation, is treated as included in the SRLY
subgroup.
(v) Coordination with other limitations.
This paragraph (c)(2) does not allow a net
operating loss to offset income to the extent inconsistent with other limitations or
restrictions on the use of losses, such as a
limitation based on the nature or activities
of members. For example, any dual consolidated loss may not reduce the taxable
income to an extent greater than that allowed under section 1503(d) and
§1.1503–2. See also §1.1502–47(q) (relating to preemption of rules for life-nonlife groups).
(vi) Anti-duplication. If the same item
of income or deduction could be taken
into account more than once in determining a limitation under this paragraph (c),
or in a manner inconsistent with any other
provision of the Internal Revenue Code or
regulations incorporating this paragraph
(c), the item of income or deduction is
taken into account only once and in such
manner that losses are absorbed in accordance with the ordering rules in paragraph
(b) of this section and the underlying purposes of this section.
(vii) Corporations that leave a SRLY
subgroup. If a loss member ceases to be
affiliated with a SRLY subgroup, the

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amount of the member’s remaining SRLY
loss from a specific year is determined by
multiplying the aggregate of the unabsorbed net operating loss carryovers of
the SRLY subgroup from that year by a
fraction, the numerator of which is the net
operating loss carryover for that year that
the member leaving the subgroup had
when it became a member of the group,
and the denominator of which is the aggregate of the net operating loss carryovers of the members of the SRLY subgroup for that year when they joined the
group. The unabsorbed net operating loss
carryovers of the SRLY subgroup are
those carryovers that have not been absorbed by the group as of the end of the
taxable year in which the loss member
leaves the group.
(viii) Examples. The principles of this
paragraph (c)(2) are illustrated by the following examples:
Example 1. Members of SRLY subgroups. (i) Individual A owns all of the stock of P, S, T and M. P
and M are each common parents of a consolidated
group. During Year 1, P sustains a $50 net operating
loss. At the beginning of Year 2, P acquires all the
stock of S at a time when the aggregate basis of S’s
assets exceeds their aggregate value by $70 and S
becomes a member of the P group. At the beginning
of Year 3, P acquires all the stock of T, T has a $60
net operating loss carryover at the time of the acquisition, and T becomes a member of the P group.
During Year 4, S forms S1 and T forms T1, each by
contributing assets with built-in gains which are, in
the aggregate, material. S1 and T1 become members
of the P group. During Year 7, M acquires all of the
stock of P, and the members of the P group become
members of the M group for the balance of Year 7.
The $50 and $60 loss carryovers of P and T are carried to Year 7 of the M group, and the value and
basis of S’s assets did not change after it became a
member of the former P group. None of the transactions described above resulted in an ownership
change under section 382(g).
(ii) Under paragraph (c)(2) of this section, a separate SRLY subgroup is determined for each loss carryover and built-in loss. In the P group, P’s $50 loss
carryover is not treated as arising in a SRLY. See
§1.1502–1(f). Consequently, the carryover is not
subject to limitation under paragraph (c) of this section in the P group.
(iii) In the M group, P’s $50 loss carryover is
treated as arising in a SRLY and is subject to the limitation under paragraph (c) of this section. A SRLY
subgroup with respect to that loss is composed of
members which were members of the P group, the
group as to which the loss was not a SRLY. The
SRLY subgroup is composed of P, the member carrying over the loss, and each other member of the P
group that became a member of the M group at the
same time as P. A member of the SRLY subgroup remains a member until it ceases to be affiliated with
P. For Year 7, the SRLY subgroup is composed of P,
S, T, S1, and T1.

July 19, 1999

(iv) In the P group, S’s $70 unrealized loss, if recognized within the 5-year recognition period after S
becomes a member of the P group, is subject to limitation under paragraph (c) of this section. See
§1.1502–15 and paragraph (c)(1)(ii) of this section.
Because S was not continuously affiliated with P, T,
or T1 for 60 consecutive months prior to joining the
P group, these corporations cannot be included in a
SRLY subgroup with respect to S’s unrealized loss
in the P group. See paragraph (c)(2)(iii) of this section. As a successor to S, S1 is included in a subgroup with S in the P group, and because 100 percent of S1’s stock is owned directly by corporations
that were members of the SRLY subgroup when the
members of the SRLY subgroup became members of
the P group, its net positive income is not excluded
from the consolidated taxable income of the P group
that may be offset by the built-in loss. See paragraph
(f) of this section.
(v) In the M group, S’s $70 unrealized loss, if
recognized within the 5-year recognition period
after S becomes a member of the M group, is subject
to limitation under paragraph (c) of this section.
Prior to becoming a member of the M group, S had
been continuously affiliated with P (but not T or T1)
for 60 consecutive months and S1 is a successor that
has remained continuously affiliated with S. Those
members had a net unrealized built-in loss immediately before they became members of the group
under §1.1502–15(c). Consequently, in Year 7, S,
S1, and P compose a subgroup in the M group with
respect to S’s unrealized loss. Because S1 was a
member of the SRLY subgroup when it became a
member of the M group and also because 100 percent of S1’s stock is owned directly by corporations
that were members of the SRLY subgroup when the
members of the SRLY subgroup became members of
the M group its net positive income is not excluded
from the consolidated taxable income of the M
group that may be offset by the recognized built-in
loss. See paragraph (f) of this section.
(vi) In the P group, T’s $60 loss carryover arose in
a SRLY and is subject to limitation under paragraph
(c) of this section. P, S, and S1 were not members of
the group in which T’s loss arose and T’s loss carryover was not subject to the overlap rule described in
paragraph (g) of this section with respect to the P
group (the former group). Thus, P, S, and S1 are not
members of a SRLY subgroup with respect to the T
carryover in the P group. See paragraph (c)(2)(i) of
this section. As a successor to T, T1 is included in a
SRLY subgroup with T in the P group; and, because
100 percent of T1’s stock is owned directly by corporations that were members of the SRLY subgroup
when the members of the SRLY subgroup became
members of the P group, its net positive income is
not excluded from the consolidated taxable income
of the P group that may be offset by the carryover.
See paragraph (f) of this section.
(vii) In the M group, T’s $60 loss carryover arose
in a SRLY and is subject to limitation under paragraph (c) of this section. T and T1 remain the only
members of a SRLY subgroup with respect to the
carryover. Because T1 was a member of the SRLY
subgroup when it became a member of the M group
and also because 100 percent of T1’s stock is owned
directly by corporations that were members of the
SRLY subgroup when the members of the SRLY subgroup became members of the M group, its net positive income is not excluded from the consolidated

56

taxable income of the M group that may be offset by
the carryover. See paragraph (f) of this section.
Example 2. Computation of SRLY subgroup limitation. (i) Individual A owns all of the stock of S, T,
P and M. P and M are each common parents of a
consolidated group. In Year 2, P acquires all the
stock of S and T from Individual A, and S and T become members of the P group. For Year 3, the P
group has a $45 CNOL, which is attributable to P,
and which P carries forward. M is the common parent of another group. At the beginning of Year 4, M
acquires all of the stock of P and the former members of the P group become members of the M
group. None of the transactions described above resulted in an ownership change under section 382(g).
(ii) P’s year to which the loss is attributable, Year
3, is a SRLY with respect to the M group. See
§1.1502–1(f)(1). However, P, S, and T compose a
SRLY subgroup with respect to the Year 3 loss
under paragraph (c)(2)(i) of this section because
Year 3 is not a SRLY (and is not treated as a SRLY)
with respect to the P group. P’s loss is carried over
to the M group’s Year 4 and is therefore subject to
the SRLY subgroup limitation in paragraph (c)(2) of
this section.
(iii) In Year 4, the M group has $10 of consolidated taxable income (computed without regard to
the CNOL deduction for Year 4). Such consolidated
taxable income would be $45 if determined by reference to only the items of P, S, and T, the members included in the SRLY subgroup with respect to P’s loss
carryover. Therefore, the SRLY subgroup limitation
under paragraph (c)(2) of this section for P’s net operating loss carryover from Year 3 is $45. Because
the M group has only $10 of consolidated taxable income in Year 4, however, only $10 of P’s net operating loss carryover is included in the CNOL deduction
under paragraph (a) of this section in Year 4.
(iv) In Year 5, the M group has $100 of consolidated taxable income (computed without regard to
the CNOL deduction for Year 5). Neither P, S, nor T
has any items of income, gain, deduction, or loss in
Year 5. Although the members of the SRLY subgroup do not contribute to the $100 of consolidated
taxable income in Year 5, the SRLY subgroup limitation for Year 5 is $35 (the sum of SRLY subgroup
consolidated taxable income of $45 in Year 4 and $0
in Year 5, less the $10 net operating loss carryover
actually absorbed by the M group in Year 4). Therefore, $35 of P’s net operating loss carryover is included in the CNOL deduction under paragraph (a)
of this section in Year 5.
Example 3. Inclusion in more than one SRLY subgroup. (i) Individual A owns all of the stock of S, T,
P and M. S, P and M are each common parents of a
consolidated group. At the beginning of Year 1, S acquires all the stock of T from Individual A, and T becomes a member of the S group. For Year 1, the S
group has a CNOL of $10, all of which is attributable to S and is carried over to Year 2. At the beginning of Year 2, P acquires all the stock of S, and S
and T become members of the P group. For Year 2,
the P group has a CNOL of $35, all of which is attributable to P and is carried over to Year 3. At the
beginning of Year 3, M acquires all of the stock of P
and the former members of the P group become
members of the M group. None of the transactions
described above resulted in an ownership change
under section 382(g).

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(ii) P’s and S’s net operating losses arising in
SRLYs with respect to the M group are subject to
limitation under paragraph (c) of this section. P, S,
and T compose a SRLY subgroup for purposes of
determining the limitation for P’s $35 net operating
loss carryover arising in Year 2 because, under paragraph (c)(2)(i) of this section, Year 2 is not a SRLY
with respect to the P group. Similarly, S and T compose a SRLY subgroup for purposes of determining
the limitation for S’s $10 net operating loss carryover arising in Year 1 because Year 1 is not a SRLY
with respect to the S group.
(iii) S and T are members of both the SRLY subgroup with respect to P’s losses and the SRLY subgroup with respect to S’s losses. Under paragraph
(c)(2) of this section, S’s and T’s items cannot be included in the determination of the SRLY subgroup
limitation for both SRLY subgroups for the same
consolidated return year; paragraph (c)(2)(vi) of this
section requires the M group to consider the items of
S and T only once so that the losses are absorbed in
the order of the taxable years in which they were
sustained. Because S’s loss was incurred in Year 1,
while P’s loss was incurred in Year 2, the items will
be added in the determination of the consolidated
taxable income of the S and T SRLY subgroup to enable S’s loss to be absorbed first. The taxable income of the P, S, and T SRLY subgroup is then computed by including the consolidated taxable income
for the S and T SRLY subgroup less the amount of
any net operating loss carryover of S that is absorbed after applying this section to the S subgroup
for the year.
Example 4. Corporation ceases to be affiliated
with a SRLY subgroup. (i) Individual A owns all of
the stock of P and M. P and S are members of the P
group and the P group has a CNOL of $30 in Year 1,
all of which is attributable to P and carried over to
Year 2. At the beginning of Year 2, M acquires all of
the stock of P, and P and S become members of the
M group. P and S compose a SRLY subgroup with
respect to P’s net operating loss carryover. For Year
2, consolidated taxable income of the M group determined by reference to only the items of P (and
without regard to the CNOL deduction for Year 2) is
$40. However, such consolidated taxable income of
the M group determined by reference to the items of
both P and S is a loss of $20. Thus, the SRLY subgroup limitation under paragraph (c)(2) of this section prevents the M group from including any of P’s
net operating loss carryover in the CNOL deduction
under paragraph (a) of this section in Year 2, and P
carries the Year 1 loss to Year 3.
(ii) At the end of Year 2, P sells all of the S stock
and S ceases to be a member of the M group and the
P subgroup. For Year 3, consolidated taxable income
of the M group is $50 (determined without regard to
the CNOL deduction for Year 3), and such consolidated taxable income would be $10 if determined by
reference to only items of P. However, the limitation
under paragraph (c) of this section for Year 3 for P’s
net operating loss carryover still prevents the M
group from including any of P’s loss in the CNOL
deduction under paragraph (a) of this section. The
limitation results from the inclusion of S’s items for
Year 2 in the determination of the SRLY subgroup
limitation for Year 3 even though S ceased to be a
member of the M group (and the P subgroup) at the
end of Year 2. Thus, the M group’s consolidated taxable income determined by reference to only the

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SRLY subgroup members’ items for all consolidated
return years of the group through Year 3 (determined
without regard to the CNOL deduction) is not a positive amount.

(ix) Application to other than loss carryovers. Paragraph (g) of this section and
the phrase “or for a carryover that was
subject to the overlap rule described in
paragraph (g) of this section or §1.150215(g) with respect to another group (the
former group)” in paragraph (c)(2) of this
section apply only to net operating loss
carryovers and net capital loss carryovers,
and not with respect to other tax attributes, such as credits. Accordingly, as the
context may require, if another regulation
references this section and such other regulation does not concern net operating
loss carryovers or net capital loss carryovers, then such reference does not include a reference to such paragraph or
phrase.
(d) Coordination with consolidated return change of ownership limitation and
transactions subject to old section 382—
(1) Consolidated return changes of ownership. If a consolidated return change of
ownership occurred before January 1,
1997, the principles of §1.1502–21A(d)
apply to determine the amount of the aggregate of the net operating losses attributable to old members of the group that
may be included in the consolidated net
operating loss deduction under paragraph
(a) of this section. For this purpose,
§1.1502–1(g) is applied by treating that
date as the end of the year of change.
(2) Old section 382. The principles of
§1.1502–21A(e) apply to disallow or reduce the amount of a net operating loss
carryover of a member as a result of a
transaction subject to old section 382.
(e) Consolidated net operating loss.
Any excess of deductions over gross income, as determined under §1.1502–11(a)
(without regard to any consolidated net
operating loss deduction), is also referred
to as the consolidated net operating loss
(or CNOL).
(f) Predecessors and successors—(1)
In general. For purposes of this section,
any reference to a corporation, member,
common parent, or subsidiary, includes,
as the context may require, a reference to
a successor or predecessor, as defined in
§1.1502–1(f)(4).
(2) Limitation on SRLY subgroups—(i)
General rule. Except as provided in para-

57

graph (f)(2)(ii) of this section, if a successor’s items of income and gain exceed the
successor’s items of deduction and loss
(net positive income), then the net positive income attributable to the successor
is excluded from the computation of the
consolidated taxable income of a SRLY
subgroup.
(ii) Exceptions. A successor’s net positive income is not excluded from the consolidated taxable income of a SRLY subgroup if—
(A) The successor acquires substantially all the assets and liabilities of its
predecessor and the predecessor ceases to
exist;
(B) The successor was a member of the
SRLY subgroup when the SRLY subgroup
members became members of the group;
(C) 100 percent of the stock of the successor is owned directly by corporations
that were members of the SRLY subgroup
when the SRLY subgroup members became members of the group; or
(D) The Commissioner so determines.
(g) Overlap with section 382—(1)
General rule. The limitation provided in
paragraph (c) of this section does not
apply to net operating loss carryovers
(other than a hypothetical carryover described in paragraph (c)(1)(i)(D) of this
section and a carryover described in paragraph (c)(1)(ii) of this section) when the
application of paragraph (c) of this section results in an overlap with the application of section 382. For a similar rule applying in the case of net operating loss
carryovers described in paragraphs
(c)(1)(i)(D) and (c)(1)(ii) of this section,
see §1.1502–15(g).
(2) Definitions—(i) Generally. For purposes of this paragraph (g), the definitions
and nomenclature contained in section
382, the regulations thereunder, and
§§1.1502–90 through 1.1502–99 apply.
(ii) Overlap—(A) An overlap of the
application of paragraph (c) of this section and the application of section 382
with respect to a net operating loss carryover occurs if a corporation becomes a
member of a consolidated group (the
SRLY event) within six months of the
change date of an ownership change giving rise to a section 382(a) limitation with
respect to that carryover (the section 382
event).
(B) If an overlap described in paragraph (g)(2)(ii)(A) of this section occurs

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with respect to net operating loss carryovers of a corporation whose SRLY event
occurs within the six month period beginning on the date of a section 382 event,
then an overlap is treated as also occurring with respect to that corporation’s net
operating loss carryover that arises within
the period beginning with the section 382
event and ending with the SRLY event.
(C) For special rules in the event that
there is a SRLY subgroup and/or a loss
subgroup as defined in §1.1502–91(d)(1)
with respect to a carryover, see paragraph
(g)(4) of this section.
(3) Operating rules—(i) Section 382
event before SRLY event. If a SRLY event
occurs on the same date as a section 382
event or within the six month period beginning on the date of the section 382
event, paragraph (g)(1) of this section applies beginning with the tax year that includes the SRLY event.
(ii) SRLY event before section 382
event. If a section 382 event occurs
within the period beginning the day after
the SRLY event and ending six months
after the SRLY event, paragraph (g)(1) of
this section applies starting with the first
tax year that begins after the section 382
event.
(4) Subgroup rules. In general, in the
case of a net operating loss carryover for
which there is a SRLY subgroup and a
loss subgroup (as defined in §1.1502–
91(d)(1)), the principles of this paragraph
(g) apply to the SRLY subgroup, and not
separately to its members. However,
paragraph (g)(1) of this section applies—
(i) With respect to a carryover described in paragraph (g)(2)(ii)(A) of this
section only if—
(A) All members of the SRLY subgroup with respect to that carryover are
also included in a loss subgroup with respect to that carryover; and
(B) All members of a loss subgroup
with respect to that carryover are also
members of a SRLY subgroup with respect to that carryover; and
(ii) With respect to a carryover described in paragraph (g)(2)(ii)(B) of this
section only if all members of the SRLY
subgroup for that carryover are also members of a SRLY subgroup that has net operating loss carryovers described in paragraph (g)(2)(ii)(A) of this section that are
subject to the overlap rule of paragraph
(g)(1) of this section.

July 19, 1999

(5) Examples. The principles of this
paragraph (g) are illustrated by the following examples:
Example 1. Overlap—Simultaneous Acquisition.
(i) Individual A owns all of the stock of P, which in
turn owns all of the stock of S. P and S file a consolidated return. In Year 2, B, an individual unrelated
to Individual A, forms T which incurs a $100 net operating loss for that year. At the beginning of Year 3,
S acquires T.
(ii) S’s acquisition of T results in T becoming a
member of the P group (the SRLY event) and also
results in an ownership change of T, within the
meaning of section 382(g), that gives rise to a limitation under section 382(a) (the section 382 event)
with respect to the T carryover.
(iii) Because the SRLY event and the change date
of the section 382 event occur on the same date,
there is an overlap of the application of the SRLY
rules and the application of section 382.
(iv) Consequently, under this paragraph (g), in
Year 3 the SRLY limitation does not apply to the
Year 2 $100 net operating loss.
Example 2. Overlap—Section 382 event before
SRLY event. (i) Individual A owns all of the stock of
P, which in turn owns all of the stock of S. P and S
file a consolidated return. In Year 1, B, an individual unrelated to Individual A, forms T which incurs
a $100 net operating loss for that year. On February
28 of Year 2, S purchases 55% of T from Individual
B. On June 30, of Year 2, S purchases an additional
35% of T from Individual B.
(ii) The February 28 purchase of 55% of T is a
section 382 event because it results in an ownership
change of T, under section 382(g), that gives rise to a
section 382(a) limitation with respect to the T carryover. The June 30 purchase of 35% of T results in T
becoming a member of the P group and is therefore a
SRLY event.
(iii) Because the SRLY event occurred within six
months of the change date of the section 382 event,
there is an overlap of the application of the SRLY
rules and the application of section 382.
(iv) Consequently, under paragraph (g) of this
section, in Year 2 the SRLY limitation does not
apply to the Year 1 $100 net operating loss.
Example 3. No overlap—Section 382 event before SRLY event. (i) The facts are the same as in Example 2 except that Individual B does not sell the
additional 35% of T to S until September 30, Year 2.
(ii) The February 28 purchase of 55% of T is a
section 382 event because it results in an ownership
change of T, under section 382(g), that gives rise to a
section 382(a) limitation with respect to the T carryover. The September 30 purchase of 35% of T results in T becoming a member of the P group and is
therefore a SRLY event.
(iii) Because the SRLY event did not occur within
six months of the change date of the section 382
event, there is no overlap of the application of the
SRLY rules and the application of section 382. Consequently, the Year 1 net operating loss is subject to a
SRLY limitation and a section 382 limitation.
Example 4. Overlap—SRLY event before section
382 event. (i) P and S file a consolidated return. S
has owned 40% of T for 6 years. For Year 6, T has an
net operating loss of $500 that is carried forward.
On March 31, Year 7, S acquires an additional 40%

58

of T, and on August 31, Year 7, S acquires the remaining 20% of T.
(ii) The March 31 purchase of 40% of T results in
T becoming a member of the P group and is therefore a SRLY event. The August 31 purchase of 20%
of T is a section 382 event because it results in an
ownership change of T, under section 382(g), that
gives rise to a section 382(a) limitation with respect
to the T carryover.
(iii) Because the SRLY event occurred within six
months of the change date of the section 382 event,
there is an overlap of the application of the SRLY
rules and the application of section 382 within the
meaning of this paragraph (g).
(iv) Under this paragraph (g), the SRLY rules of
paragraph (c) of this section will apply to the Year 7
tax year. Beginning in Year 8 (the year after the section 382 event), any unabsorbed portion of the Year
6 net operating loss will not be subject to a SRLY
limitation.
Example 5. Overlap—Coextensive subgroups. (i)
Individual A owns all of the stock of S, which in turn
owns all of the stock of T. S and T file a consolidated return beginning in Year 1. B, an individual
unrelated to A, owns all of the stock of P, the common parent of a consolidated group. In Year 2, the S
group has a $200 consolidated net operating loss
which is carried forward, of which $100 is attributable to S, and $100 is attributable to T. At the beginning of Year 3, the P group acquires all of the stock
of S from Individual A.
(ii) P’s acquisition of S results in S and T becoming members of the P group (the SRLY event). With
respect to the Year 2 net operating loss carryover, S
and T compose a SRLY subgroup under paragraph
(c)(2) of this section.
(iii) S and T also compose a loss subgroup under
§1.1502-91(d)(1) with respect to the Year 2 net operating loss carryover. P’s acquisition also results in
an ownership change of S, the subgroup parent,
within the meaning of section 382(g), that gives rise
to a limitation under section 382(a) (the section 382
event) with respect to the Year 2 carryover.
(iv) Because the SRLY event and the change date
of the section 382 event occur on the same date,
there is an overlap of the application of the SRLY
rules and the application of section 382 within the
meaning of paragraph (g) of this section. Because
the SRLY subgroup and the loss subgroup are coextensive, under paragraph (g) of this section, the
SRLY limitation does not apply to the Year 2 $200
net operating loss.
Example 6. No Overlap—Different subgroups. (i)
Individual B owns all of the stock of P, the common
parent of a consolidated group. P owns all of the
stock of S and all of the stock of T. Individual A
owns all of the stock of X, the common parent of another consolidated group. In Year 1, the P group has
a $200 consolidated net operating loss, of which
$100 is attributable to S and $100 is attributable to
T. At the beginning of Year 3, the X group acquires
all of the stock of S and T from P and does not make
an election under §1.1502–91(d)(4) (concerning an
election to treat the loss subgroup parent requirement as having been satisfied).
(ii) X’s acquisition of S and T results in S and T
becoming members of the X group (the SRLY
event). With respect to the Year 1 net operating loss,

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S and T compose a SRLY subgroup under paragraph
(c)(2) of this section.
(iii) S and T do not bear (and are not treated as
bearing) a section 1504(a)(1) relationship. Therefore
S and T do not qualify as a loss subgroup under
§1.1502–91(d)(1). X’s acquisition of S and T results
in separate ownership changes of S and T, that give
rise to separate limitations under section 382(a) (the
section 382 events) with respect to each of S and T’s
Year 1 net operating loss carryovers. See §1.1502–94.
(iv) The SRLY event and the change dates of the
section 382 events occur on the same date. However, paragraph (g)(1) of this section does not apply
because the SRLY subgroup (composed of S and T)
is not coextensive with a loss subgroup with respect
to the Year 1 carryovers. Consequently, the Year 1
net operating loss is subject to both a SRLY subgroup limitation and also separate section 382 limitations for each of S and T.
Example 7. No Overlap—Different subgroups. (i)
Individual A owns all of the stock of T and all of the
stock of S, the common parent of a consolidated
group. B, an individual unrelated to Individual A,
owns all of the stock of P, the common parent of another consolidated group. In Year 1, T has a net operating loss of $100 that is carried forward. At the
end of Year 2, S acquires all of the stock of T from
Individual A. In Year 3, the S group sustains a $200
consolidated net operating loss that is carried forward. In Year 8, the P group acquires all of the stock
of S from Individual A.
(ii) S’s acquisition of T in Year 1 results in T becoming a member of the S group. The acquisition,
however, did not result in an ownership change
under section 382(g). As a result, T’s Year 1 net operating loss is subject to SRLY within the S group.
At the end of Year 7, §1.1502–96(a) treats T’s Year 1
net operating loss as not having arisen in a SRLY
with respect to the S group. Section 1.1502–96(a),
however, applies only for purposes of §§1.1502–91
through 1.1502–96 and §1.1502–98 but not for purposes of this section. See §1.1502–96(a)(5).
(iii) P’s acquisition of S in Year 8 results in S and
T becoming members of the P group (the SRLY
event). With respect to the Year 1 net operating loss,
S and T do not compose a SRLY subgroup under
paragraph (c)(2) of this section.
(iv) S and T compose a loss subgroup under
§1.1502–91(d)(1) with respect to the Year 1 net operating loss carryover. P’s acquisition of S results in
an ownership change of the loss subgroup, within
the meaning of section 382(g), that gives rise to a
subgroup limitation under section 382(a) (the section 382 event) with respect to that carryover.
(v) The SRLY event and the change date of the
section 382 event occur on the same date. However,
under paragraph (g)(4) of this section, because the
SRLY subgroup and the loss subgroup are not coextensive, T’s Year 1 net operating loss carryover is
subject to a SRLY limitation.
(vi) With respect to the Year 3 net operating loss
carryover, S and T compose both a SRLY subgroup
and a loss subgroup under §1.1502–91(d)(1). Thus,
paragraph (g)(1) of this section applies and the S
group’s Year 3 net operating loss carryover is not
subject to a SRLY limitation.
Example 8. SRLY after overlap. (i) Individual A
owns all of the stock of R and M, each the common
parent of a consolidated group. B, an individual unrelated to Individual A, owns all of the stock of D.

1999–29 I.R.B.

In Year 1, D incurs a $100 net operating loss that is
carried forward. At the beginning of Year 3, R acquires all of the stock of D. In Year 5, M acquires all
of the stock of R in a transaction that did not result
in an ownership change of R.
(ii) R’s Year 3 acquisition of D results in D becoming a member of the R group (the SRLY event)
and also results in an ownership change of D, that
gives rise to a limitation under section 382(a) (the
section 382 event) with respect to D’s net operating
loss carryover.
(iii) Because the SRLY event and the change date
of the section 382 event occur on the same date,
there is an overlap of the application of paragraph
(c) of this section and section 382 with respect to
D’s net operating loss. Consequently, under this
paragraph (g), D’s Year 1 $100 net operating loss is
not subject to a SRLY limitation in the R group.
(iv) M’s Year 5 acquisition of R results in R and
D becoming members of the M group (the SRLY
event), but does not result in an ownership change of
R or D that gives rise to a limitation under section
382(a). Because there is no section 382 event, the
application of the SRLY rules and section 382 do not
overlap. Consequently, D’s Year 1 $100 net operating loss is subject to a SRLY limitation in the M
group.
(v) Because D’s Year 1 net operating loss carryover was subject to the overlap rule of paragraph (g)
of this section when it joined the R group, under
§1.1502-21(c)(2) the SRLY subgroup with respect to
that carryover includes all of the members of the R
group that joined the M group at the same time as D.
Example 9. Overlap—Interim losses. (i) Individual A owns all of the stock of P and S, each the common parent of a consolidated group. S owns all of
the stock of T, its only subsidiary. B, an individual
unrelated to Individual A, owns all of the stock of
M, the common parent of a consolidated group. In
Year 1, the S group has a $100 consolidated net operating loss. On January 1 of Year 2, P acquires all
of the stock of S from Individual A. On January 1 of
Year 3, M acquires 51% of the stock of P from Individual A. On May 31 of Year 3, M acquires the remaining 49% of the stock of P from Individual A.
The P group, for the Year 3 period prior to June 1
had a $50 consolidated net operating loss, and under
paragraph (b)(2)(iv) of this section, the loss is attributable entirely to S. Other than the losses described
above, the P group does not have any other consolidated net operating losses.
(ii) In the P group, S’s $100 loss carryover is
treated as arising in a SRLY and is subject to the limitation under paragraph (c) of this section. A SRLY
subgroup with respect to that loss is composed of S
and T, the members which were members of the S
group as to which the loss was not a SRLY.
(iii) M’s January 1 purchase of 51% of P is a section 382 event because it results in an ownership
change of S and T that gives rise to a section 382(a)
limitation (the section 382 event) with respect to the
Year 1 net operating loss carryover. The purchase,
however, does not result in an ownership change of
P because it is not a loss corporation under section
382(k)(1). M’s May 31 purchase of 49% of P results
in P, S, and T becoming members of the M group
and is therefore a SRLY event.
(iv) With respect to the Year 1 net operating loss,
S and T compose a SRLY subgroup under paragraph
(c)(2) of this section and a loss subgroup under

59

§1.1502–91(d)(1). The loss subgroup does not include P because the only loss at the time of the section 382 event was subject to SRLY with respect to
the P group. See §1.1502–91(d)(1).
(v) Because the SRLY event and the change date
of the section 382 event occur on the same date and
the SRLY subgroup and loss subgroup are coextensive with respect to the Year 1 net operating loss carryover, there is an overlap of the application of the
SRLY rules and the application of section 382 within
the meaning of paragraph (g) of this section. Thus,
the SRLY limitation does not apply to that carryover.
(vi) The Year 3 net operating loss, which arose
between the section 382 event and the SRLY event,
is a net operating loss described in paragraph
(g)(2)(ii)(B) of this section because it is the net operating loss of a corporation whose SRLY event occurs
within the six month period beginning on the date of
a section 382 event.
(vii) With respect to the Year 3 net operating loss,
P, S, and T compose a SRLY subgroup under paragraph (c)(2) of this section. Because P, a member of
the SRLY subgroup for the Year 3 carryover, is not
also a member of a SRLY subgroup that has net operating loss carryovers described in paragraph
(g)(2)(ii)(A) of this section (the Year 1 net operating
loss), the Year 3 carryover is subject to a SRLY limitation in the M group. See paragraph (g)(4)(ii) of
this section.

(h) Effective date—(1) In general. This
section generally applies to taxable years
for which the due date (without extensions) of the consolidated return is after
June 25, 1999. However—
(i) In the event that paragraph (g)(1) of
this section does not apply to a particular
net operating loss carryover in the current
group, then solely for purposes of applying paragraph (c) of this section to determine a limitation with respect to that carryover and with respect to which the
SRLY register (consolidated taxable income determined by reference to only the
member’s or subgroup’s items of income,
gain, deduction or loss) began in a taxable
year for which the due date of the return
was on or before June 25, 1999), paragraph (c)(2) of this section shall be applied without regard to the phrase “or for
a carryover that was subject to the overlap
rule described in paragraph (g) of this section or §1.1502–15(g) with respect to another group (the former group)”; and
(ii) For purposes of paragraph (g) of
this section, only an ownership change to
which section 382(a), as amended by the
Tax Reform Act of 1986, applies shall
constitute a section 382 event.
(2) SRLY limitation. Except in the case
of those members (including members of
a SRLY subgroup) described in paragraph
(h)(3) of this section, a group does not

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take into account a consolidated taxable
year beginning before January 1, 1997, in
determining the aggregate of the consolidated taxable income under paragraph
(c)(1) of this section (including for purposes of §1.1502–15 and §1.1502–22(c))
for the members (or SRLY subgroups).
(3) Prior retroactive election. A consolidated group that applied the rules of
§1.1502–21T(g)(3) in effect prior to June
25, 1999, as contained in 26 CFR part 1
revised April 1, 1999, to all consolidated
return years ending on or after January
29, 1991, and beginning before January 1,
1997, does not take into account a consolidated taxable year beginning before January 29, 1991, in determining the aggregate of the consolidated taxable income
under paragraph (c)(1) of this section (including for purposes of §1.1502–15 and
§1.1502–22(c)) for the members (or
SRLY subgroups).
(4) Offspring rule. Paragraph (b)(2)(ii)(B) of this section applies to net operating
losses arising in taxable years ending on
or after June 25, 1999.
(5) Waiver of carrybacks. Paragraph
(b)(3)(ii)(B) of this section (relating to the
waiver of carrybacks for acquired members) applies to acquisitions occurring
after August 24, 1999.
(6) Prior periods. For certain taxable
years ending on or before June 25, 1999,
see §1.1502–21T in effect prior to June
25, 1999, as contained in 26 CFR part 1
revised April 1, 1999, as applicable.
§1.1502–21T [Removed]
Par. 7. Section 1.1502–21T is removed.
Par. 8. Section 1.1502–22 is added to
read as follows:
§1.1502–22 Consolidated capital gain
and loss.
(a) Capital gain. The determinations
under section 1222, including capital gain
net income, net long-term capital gain,
and net capital gain, with respect to members during consolidated return years are
not made separately. Instead, consolidated
amounts are determined for the group as a
whole. The consolidated capital gain net
income for any consolidated return year is
determined by reference to—
(1) The aggregate gains and losses of
members from sales or exchanges of capital assets for the year (other than gains
and losses to which section 1231 applies);

July 19, 1999

(2) The consolidated net section 1231
gain for the year (determined under
§1.1502–23); and
(3) The net capital loss carryovers or
carrybacks to the year.
(b) Net capital loss carryovers and carrybacks—(1) In general. The determinations under section 1222, including net
capital loss and net short-term capital
loss, with respect to members during consolidated return years are not made separately. Instead, consolidated amounts are
determined for the group as a whole.
Losses included in the consolidated net
capital loss may be carried to consolidated return years, and, after apportionment, may be carried to separate return
years. The net capital loss carryovers and
carrybacks consist of—
(i) Any consolidated net capital losses
of the group; and
(ii) Any net capital losses of the members arising in separate return years.
(2) Carryovers and carrybacks generally. The net capital loss carryovers and
carrybacks to a taxable year are determined under the principles of section
1212 and this section. Thus, losses permitted to be absorbed in a consolidated
return year generally are absorbed in the
order of the taxable years in which they
were sustained, and losses carried from
taxable years ending on the same date,
and which are available to offset consolidated capital gain net income, generally
are absorbed on a pro rata basis. Additional rules provided under the Internal
Revenue Code or regulations also apply,
as well as the SRLY limitation under
paragraph (c) of this section. See, e.g.,
section 382(l)(2)(B).
(3) Carryovers and carrybacks of consolidated net capital losses to separate return years. If any consolidated net capital
loss that is attributable to a member may
be carried to a separate return year under
the principles of §1.1502–21(b)(2), the
amount of the consolidated net capital
loss that is attributable to the member is
apportioned and carried to the separate return year (apportioned loss).
(4) Special rules—(i) Short years in
connection with transactions to which
section 381(a) applies. If a member distributes or transfers assets to a corporation
that is a member immediately after the
distribution or transfer in a transaction to
which section 381(a) applies, the transac-

60

tion does not cause the distributor or
transferor to have a short year within the
consolidated return year of the group in
which the transaction occurred that is
counted as a separate year for purposes of
determining the years to which a net capital loss may be carried.
(ii) Special status losses. [Reserved]
(c) Limitations on net capital loss carryovers and carrybacks from separate return limitation years. The aggregate of
the net capital losses of a member arising
(or treated as arising) in SRLYs that are
included in the determination of consolidated capital gain net income for all consolidated return years of the group under
paragraph (a) of this section may not exceed the aggregate of the consolidated
capital gain net income for all consolidated return years of the group determined by reference to only the member’s
items of gain and loss from capital assets
as defined in section 1221 and trade or
business assets defined in section
1231(b), including the member’s losses
actually absorbed by the group in the taxable year (whether or not absorbed by the
member). The principles of §1.1502–
21(c) (including the SRLY subgroup principles under §1.1502–21(c)(2)) apply
with appropriate adjustments for purposes
of applying this paragraph (c).
(d) Coordination with respect to consolidated return change of ownership limitation occurring in consolidated return
years beginning before January 1, 1997.
If a consolidated return change of ownership occurred before January 1, 1997, the
principles of §1.1502–22A(d) apply to
determine the amount of the aggregate of
the net capital loss attributable to old
members of the group (as those terms are
defined in §1.1502–1(g)), that may be included in the net capital loss carryover
under paragraph (b) of this section. For
this purpose, §1.1502–1(g) is applied by
treating that date as the end of the year of
change.
(e) Consolidated net capital loss. Any
excess of losses over gains, as determined
under paragraph (a) of this section (without regard to any carryovers or carrybacks), is also referred to as the consolidated net capital loss.
(f) Predecessors and successors. For
purposes of this section, the principles of
§1.1502–21(f) apply with appropriate adjustments.

1999–29 I.R.B.

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(g) Overlap with section 383—(1)
General rule. The limitation provided in
paragraph (c) of this section does not
apply to net capital loss carryovers ((other
than a hypothetical carryover like those
described in §1.1502–21(c)(1)(i)(D) and a
carryover like those described in
§1.1502–21(c)(1)(ii)) when the application of paragraph (c) of this section results
in an overlap with the application of section 383. For a similar rule applying in
the case of net capital loss carryovers like
those described in §§1.1502–21(c)(1)(i)(D) and (c)(1)(ii), see §1.1502–15(g).
(2) Definitions—(i) Generally. For
purposes of this paragraph (g), the definitions and nomenclature contained in sections 382 and 383, the regulations thereunder, and §§1.1502–90 through
1.1502–99 apply.
(ii) Overlap. (A) An overlap of the application of paragraph (c) of this section
and the application of section 383 with respect to a net capital loss carryover occurs
if a corporation becomes a member of the
consolidated group (the SRLY event)
within six months of the change date of an
ownership change giving rise to a section
382 limitation with respect to that carryover (the section 383 event).
(B) If an overlap described in paragraph (g)(2)(ii)(A) of this section occurs
with respect to net capital loss carryovers
of a corporation whose SRLY event occurs within the six month period beginning on the date of a section 383 event,
then an overlap is treated as also occurring with respect to that corporation’s net
capital loss carryover that arises within
the period beginning with the section 383
event and ending with the SRLY event.
(C) For special rules in the event that
there is a SRLY subgroup and/or a loss
subgroup as defined in §1.1502–91(d)(1)
with respect to a carryover, see paragraph
(g)(4) of this section.
(3) Operating rules—(i) Section 383
event before SRLY event. If a SRLY event
occurs on the same date as a section 383
event or within the six month period beginning on the date of the section 383
event, paragraph (g)(1) of this section applies beginning with the tax year that includes the SRLY event.
(ii) SRLY event before section 383
event. If a section 383 event occurs
within the period beginning the day after
the SRLY event and ending six months

1999–29 I.R.B.

after the SRLY event, paragraph (g)(1) of
this section applies starting with the first
tax year that begins after the section 383
event.
(4) Subgroup rules. In general, in the
case of a net capital loss carryover for
which there is a SRLY subgroup and a
loss subgroup (as defined in §1.1502–
91(d)(1)), the principles of this paragraph
(g) apply to the SRLY subgroup, and not
separately to its members. However,
paragraph (g)(1) of this section applies—
(i) With respect to a carryover described in paragraph (g)(2)(ii)(A) of this
section only if—
(A) All members of the SRLY subgroup with respect to that carryover are
also included in a loss subgroup with respect to that carryover; and
(B) All members of a loss subgroup
with respect to that carryover are also
members of a SRLY subgroup with respect to that carryover; and
(ii) With respect to a carryover described in paragraph (g)(2)(ii)(B) of this
section only if all members of the SRLY
subgroup for that carryover are also members of a SRLY subgroup that has net capital loss carryovers described in paragraph
(g)(2)(ii)(A) of this section that are subject to the overlap rule of paragraph (g)(1)
of this section.
(h) Effective date—(1) In general. This
section generally applies to taxable years
for which the due date (without extensions) of the consolidated return is after
June 25, 1999. However—
(i) In the event that paragraph (g)(1) of
this section does not apply to a particular
net capital loss carryover in the current
group, then solely for purposes of applying paragraph (c) of this section to determine a limitation with respect to that carryover and with respect to which the
SRLY register (consolidated taxable income determined by reference to only the
member’s or subgroup’s items of income,
gain, deduction or loss) began in a taxable
year for which the due date of the return
was on or before June 25, 1999), the principles of §1.1502–21(c)(2) shall be applied without regard to the phrase “or for
a carryover that was subject to the overlap
rule described in paragraph (g) of this section or §1.1502–15(g) with respect to another group (the former group)”; and
(ii) For purposes of paragraph (g) of
this section, only an ownership change to

61

which section 383, as amended by the Tax
Reform Act of 1986, applies and which
results in a section 382 limitation shall
constitute a section 383 event.
(2) Prior periods. For certain taxable
years ending on or before June 25, 1999,
see §1.1502–22T in effect prior to June
25, 1999, as contained in 26 CFR part 1
revised April 1, 1999, as applicable.
§1.1502–22T [Removed]
Par. 9. Section 1.1502–22T is removed.
Par. 10. Section 1.1502–23 is added to
read as follows:
§1.1502–23 Consolidated net section
1231 gain or loss.
(a) In general. Net section 1231 gains
and losses of members arising during consolidated return years are not determined
separately. Instead, the consolidated net
section 1231 gain or loss is determined
under this section for the group as a
whole.
(b) Example. The following example illustrates the provisions of this section:
Example. Use of SRLY registers with net gains
and net losses under section 1231. (i) In Year 1, T
sustains a $20 net capital loss. At the beginning of
Year 2, T becomes a member of the P group. T’s capital loss carryover from Year 1 is subject to SRLY
limits under §1.1502–22(c). The members of the P
group contribute the following to the consolidated
taxable income for Year 2 (computed without regard
to T’s net capital loss carryover under §1.1502–22):
P

T

Year 1 (SRLY)
Ordinary
Capital
Ordinary
Capital
§1231

(20)
Year 2
10
70
(60)

20
0
30

(ii) Under section 1231, if the section 1231 losses
for any taxable year exceed the section 1231 gains
for such taxable year, such gains and losses are
treated as ordinary gains or losses. Because the P
group’s section 1231 losses, $(60), exceed the section 1231 gains, $30, the P group’s net loss is treated
as an ordinary loss. T’s net section 1231 gain has the
same character as the P group’s consolidated net section 1231 loss, so T’s $30 of section 1231 income is
treated as ordinary income for purposes of applying
§1.1502–22(c). Under §1.1502–22(c), the group’s
consolidated net capital gain determined by reference only to T’s items is $0. None of T’s capital loss
carryover from Year 1 may be taken into account in
Year 2.

(c) Recapture of ordinary loss. [Reserved]

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Page 62

(d) Effective date—(1) In general. This
section applies to gains and losses arising
in the determination of consolidated net
section 1231 gain or loss for taxable years
for which the due date (without extensions) of the consolidated return is taxable
years is after June 25, 1999.
(2) Application to prior periods. See
§1.1502–21(h)(3) for rules applicable to
groups that applied the rules of this section to consolidated return years ending
on or after January 29, 1991, and beginning before January 1, 1997.
§1.1502–23T [Removed]
Par. 11. Section 1.1502–23T is removed.
PART 602—OMB CONTROL
NUMBERS UNDER THE
PAPERWORK REDUCTION ACT
Par. 12. The authority citation for part
602 continues to read as follows:
Authority: 26 U.S.C. 7805.
Par. 13. In §602.101, paragraph (b) is
amended by removing the entry for
§1.1502–21T from the table and adding
an entry in numerical order to the table to
read as follows:
§602.101 OMB Control numbers.
* * * * *
(b) * * *
CFR part or section
where identified
and described

Current OMB
control No.

26 CFR 1.1502–91A: Application of Section 382
with respect to a consolidated group generally
applicable for testing dates before June 25, 1999.

T.D. 8824
DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Parts 1 and 602
Regulations Under Section 1502
of the Internal Revenue Code of
1986; Limitations on Net
Operating Loss Carryforwards
and Certain Built-in Losses and
Credits Following an Ownership
Change of a Consolidated Group
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION:
tions.

Final and temporary regula-

SUMMARY: This document contains
final regulations regarding the operation
of sections 382 and 383 of the Internal
Revenue Code of 1986 (relating to limitations on net operating loss carryforwards
and certain built-in losses and credits following an ownership change) with respect
to consolidated groups. The regulations
include rules for determining whether a
loss group or a loss subgroup has an ownership change, for computing a consolidated section 382 limitation or subgroup
section 382 limitation, and for applying
sections 382 and 383 to corporations that
join or leave a group. The rules are necessary to provide guidance to such groups
on the use of certain of their tax attributes.

* * * * *
1.1502–21 . . . . . . . . . . . . . . 1545–1237
* * * * *
John M. Dalrymple,
Acting Deputy Commissioner of
Internal Revenue.
Approved June 18, 1999.
Donald C. Lubick,
Assistant Secretary of
the Treasury.
(Filed by the Office of the Federal Register on June
25, 1999, 1:27 p.m., and published in the issue of the
Federal Register for July 2, 1999, 64 F.R. 36091)

July 19, 1999

DATES: Effective Dates: These regulations are effective June 25, 1999.
Applicability Dates: For dates of application and special effective date rules, see
Effective Dates under SUPPLEMENTARY INFORMATION.
FOR FURTHER INFORMATION CONTACT: Lee A. Kelley at (202) 622-7550
(not a toll-free number).
SUPPLEMENTARY INFORMATION:
Paperwork Reduction Act
The collection of information in these
final regulations has been reviewed and,
pending receipt and evaluation of public
comments, approved by the Office of

62

Management and Budget (OMB) under
44 U.S.C. 3507 and assigned control
number 1545–1218.
The collections of information in this
regulation are in §§1.1502–20(g)(4),
1.1502–95(e)(8), 1.1502–95(f), and
1.1502–96(e). This information is required to assure that a section 382 limitation is properly determined and applied in
cases of corporations that become or cease
to be members of a consolidated group.
The collection of information in
§1.1502–98(e)(8) is mandatory. The other
collections of information are required to
obtain a benefit. The likely respondents
are business or other for-profit institutions.
Comments on the collection of information should be sent to the Office of
Management and Budget, Attn: Desk
Officer for the Department of the Treasury, Office of Information and Regulatory Affairs, Washington, DC 20503, with
copies to the Internal Revenue Service,
Attn: IRS Reports Clearance Officer,
OP:FS:FP, Washington, DC 20224. Comments on the collection of information
should be received by August 31, 1999.
Comments are specifically requested concerning:
Whether the collection[s] of information
is necessary for the proper performance of
the functions of the Internal Revenue
Service, including whether the information will have practical utility;
The accuracy of the estimated burden associated with the collection of information (see below);
How the quality, utility, and clarity of the
information to be collected may be enhanced;
How the burden of complying with the
collection[s] of information may be minimized, including through the application
of automated collection techniques or
other forms of information technology;
and
Estimates of capital or start-up costs and
costs of operation, maintenance, and purchase of service to provide information.
Estimated total annual reporting burden:
662 hours.
The estimated annual burden per respondent varies from 15 to 25 minutes, depending on individual circumstances,
with an estimated average of 20 minutes.
Estimated number of respondents: 12,054
Estimated annual frequency of responses:
On occasion

1999–29 I.R.B.